1

NDIC QUARTERLY

Volume 16 September/December 2006 Nos 3/4 TABLE OF CONTENTS Content Page Review of Developments in Banking and Finance in the Third and Fourth Quarters of 2006 1-12 By Research Department The third and fourth quarters of 2006 witnessed a number of developments in the nation’s banking industry. Some of these developments included the introduction of new interest rate regime and the handing over of some failed banks to new buyers in pursuant of the adopted Purchase and Assumption method of bank failure resolution. In addition, during the period under review, the Corporation organized the second edition of the Depositors Protection Week. Details of those developments and many others including changes in rates on major financial instruments, the naira exchange rate and performance of quoted banks on the Nigerian Stock Exchange are presented in this paper. Financial Condition and Performance of Insured Banks in the Third and Fourth Quarters of 2006 13-27 The overall financial condition and performance of the insured banks during the second half of 2006 were mixed. On the one hand, total assets of the industry increased during the period under review whilst there was also an improvement in asset quality; ditto for Capital to Risk-Weighted Asset and Liquidity Ratios which also experienced increases. On the other hand, there was a significant decrease in earnings and profitability. Details of these and other indicators are contained in this paper.

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Post Consolidation Banking Era and the Nigeria Deposit Insurance Corporation: Issues and Challenges 28-38 By Mr. G. A. Ogunleye, OFR Managing Director/ Chief Executive Officer This paper which was delivered as a keynote address at the fifth NDIC-sponsored FICAN workshop looked at the expected implications of competition amongst the 25 banks following the conclusion of the consolidation exercise in the banking industry. In a broad sense, some of the implications of increased competition in the banking industry, which were examined in the paper, bordered on effective supervision, effective risk management, strong corporate governance and market discipline amongst others. Legal Issues in Bank Liquidation 39-63 By Mr. A. B. Nyako Board/ Secretary/Director, Legal Department In this paper, an attempt was made by the author to unravel the legal issues/challenges surrounding liquidation of failed banks in Nigeria. Starting with an elucidation of the principles and laws guiding bank liquidation, it delved into the liquidation process and finally examined, in details, the challenges there-from. Amongst those issues examined were the dual capacity of the Corporation, rule against preferential payment and the protection of assets of banks in liquidation. Overview of the Banking Consolidation Programme and Its Aftermath 64-92 By Dr. J. A. Afolabi, Deputy Director/Research Department This paper highlighted the outcomes of the consolidation in the banking industry. In particular, it related the aftermath of the exercise to each of the identified stakeholders vis-à-vis their mandates. Amongst the stakeholders identified were the banks, the regulatory/ supervisory bodies and the banking public. Issues in Purchase and Assumption as a Bank Failure Resolution Option: The Case of the 14 Closed Banks 93-102 By Mr. A. A. Adeleke Deputy Director, Receivership & Liquidation Department The author discussed the main options available to regulatory authorities to resolving bank failures. It went further to examine, in details, the issues and challenges of the Purchase and Assumption method which was employed by the authorities recently as a failure resolution option in Nigeria.

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MAJOR DEVELOPMENTS IN THE BANKING SECTOR DURING THE SECOND HALF OF 2006 By RESEARCH DEPARTMENT 1.0 INTRODUCTION

A major development observed in the industry during the period under

review was the introduction of new interest rate regime by the Central Bank

of Nigeria (CBN). The new rate referred to as the Monetary Policy Rate is to

serve as the nominal anchor for all interest rates in the country. During the

same period, the Debt Management Office (DMO) launched the Primary

Dealer Market Maker System in its efforts to create a liquid and vibrant

market in the sale and purchase of FGN Bonds. In the Corporation, the

second edition of Depositors’ Protection Awareness Week was organized

towards the end of the year. Details of those developments and others

including the reports on interest rates on major instruments in the money

market, the Naira exchange rates as well as the performance of banks quoted

on the Nigerian Stock Exchange during period are presented below.

2.0 INTRODUCTION OF NEW INTEREST RATE REGIME

Towards the end of 2006, the CBN introduced a new interest rate regime in

the country with the establishment of an “operating target” interest rate as

the nominal anchor of all interest rates in the country. The apex bank stated

that the new rate, christened referred to as Monetary Policy Rate (MPR)

which became effective from December 11, 2006, was introduced in a bid to

move the economy towards a market-driven interest rate regime and enhance

its efficiency in the conduct of monetary policy. Before then, the Minimum

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Re-discount Rate (MRR) was the nominal anchor of all interest rates in the

economy and had been the rate at which the CBN re-discount facilities for

banks and as such, influenced directly the level and direction of change in

interest rates.

According to the CBN, the ultimate goal of the new framework was to

achieve a stable value of the domestic currency through stability in short-

term interest rates around the “operating target” interest rate, which would

be determined and operated by the CBN. The “operating target” rate

otherwise called the Monetary Policy Rate (MPR) would serve as an

indicative rate for transactions in the inter-bank market, money market as

well as other Deposit Money Banks’ interest rates. In addition, the new

regime was expected to help in the control of the supply of settlement

balances of banks and motivate the banking system to target zero balances at

the CBN. That, according to the apex bank, would engender symmetric

treatment of deficits and surpluses in the settlement accounts, so that for any

bank, the cost of an overdraft at the CBN would be equal to the opportunity

cost of holding a surplus balance with the apex bank.

According to the CBN, actual and expected inflation rates would be key

considerations in the determination of the MPR. This was to ensure that

interest rates remain positive in real terms. In that respect, the MPR was

pegged at 10 percent, using the current rate of inflation and the expected

inflation rate outcome of 9 percent for 2006. A spread of 600 basis points

was built around the rate, i.e. 300 basis points below and 300 basis points

above. That translated into an upper limit of 13 percent, which would be the

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Repo rate and a lower limit of 7 percent, representing the rate at which the

CBN would take deposits from banks.

3.0 DEBT MANAGEMENT OFFICE (DMO) LAUNCHED THE

PRIMARY DEALER MARKET MAKER (PDMM) SYSTEM IN FEDERAL GOVERNMENT OF NIGERIA (FGN) BONDS

In its attempt to build and grow a vibrant and liquid bond market, the Debt

Management Office (DMO) inaugurated the Primary Dealers and Market

Makers System in FGN Bonds with the granting of licenses to 15 Primary

Dealers and Market Makers (PDMMs) during the period under review. The

operators comprised ten banks and five discount houses. Their names were

as follows:

BANKS

v Access Bank PLC

v Fidelity Bank PLC

v First Bank PLC

v First City Monument Bank PLC

v Guaranty Trust Bank PLC

v IBTC-Chartered Bank PLC

v Nigeria International Bank

v Stanbic Bank

v Standard Chartered Bank

v United Bank of Africa PLC

DISCOUNT HOUSES

v Associated Discount House Limited

v Consolidated Discounts Limited

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v Express Discount Limited

v First Securities Discount House Limited

v Kakawa Discount House Limited

The roles and responsibilities of PDMMs included the following:

i) Full take up of bond auctions and distribution of same to the investing

public;

ii) Making markets by facilitating active trading in FGN Bonds through

the provision of two-way price quotes; and

iii) Provision of market information.

4.0 ORGANIZATION OF THE 2ND EDITION OF THE DEPOSITORS’ PROTECTION AWARENESS WEEK BY NDIC

During the last quarter of the year, the Corporation organized the 2nd

Depositors’ Protection Awareness Week. The theme of the programme

which took place from November 20 – 24, 2006 was “Deposit Insurance

Scheme: Legal and Liquidation Challenges”. Some major activities that

took place during the Awareness Week included a Press Briefing by the

Managing Director/Chief Executive Officer (CEO) of the Corporation

NDIC, Mr G. A. Ogunleye, OFR; the presentation of the Nigerian Banking

Law Reports (NBLR) as well as a Public Lecture. There was also a

memorable novelty football match which involved both male and female

senior staff/executives of the Corporation. Finally, a gala night/dinner was

organized for staff of the Corporation to end the week.

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5.0 TWO BANKS-IN-LIQUIDATION (LEAD AND ASSURANCE BANKS) HANDED OVER TO AFRIBANK NIGERIA PLC

During the period under review, the nation’s regulatory/supervisory

authorities formally handed over the former Lead Bank Plc (in-liquidation)

and Assurance Bank Plc (in-liquidation) to the management of Afribank

Nigeria Plc. Afribank PLC emerged the winner following a competitive bid

for the purchase of the assets of the two banks as well as the assumption of

their deposit liabilities.

The handing over, was a follow-up to the announcement made earlier in the

month of Afribank as the winner of the bid for the assets of the two banks by

the Central Bank of Nigeria (CBN) under the Purchase and Assumption (P

& A) method of failure resolution. During the handing over, the

Regulatory/Supervisory Authorities commended Afribank Nigeria Plc for its

competitive bid and business-like approach, which worked in the bank’s

favour. Accepting the offer, the bank thanked the NDIC and CBN for the

opportunity given to it to participate in the transaction and the transparency

exhibited in the whole process.

6.0 THE RELEASE OF A CIRCULAR ON WAIVER OF THE

APPLICATION, LICENSING AND CHANGE OF NAME FEES FOR EXISTING COMMUNITY BANKS CONVERTING TO MICROFINANCE BANKS BY THE CBN

In order to encourage existing Community Banks (CBs) to expeditiously

convert to Microfinance Banks (MFBs), the Central Bank of Nigeria (CBN)

approved the waiver of application fees of =N=50,000 and =N=100,000, as

well as the licensing fees of =N=100,000 and =N=250,000 for all CBs

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converting to Unit and State MFBs, respectively. The CBN also approved a

waiver of the change of name fee of =N=5,000 for any converting CB. The

gesture as stated in the Circular Ref No: OFID/DO/CIR./Vol. 1/484 addressed

to all Chairmen, Directors and Managers of all Community Banks in the

system, was to minimize the cost of documentation and other requirements for

conversion by CBs to MFBs on or before 31st December, 2007. The

concession as indicated in the Circular would automatically lapse by December

31, 2007.

7.0 US $7 BILLION OF NIGERIA’S FOREIGN RESERVES

APPORTIONED TO 14 NIGERIAN BANKS AND THEIR FOREIGN

PARTNERS

During the period under review, the CBN disclosed that it had so far

apportioned $7 billion out of the nation’s external reserves which stood at

$38.07 billion as at the end of July 2006, to 14 global asset managers and

their 14 Nigerian local banks to manage.

The amount bequeathed to the asset managers represented 18.39 percent of

the total external reserves, which was hitherto kept with foreign banks. The

fourteen global asset managers and their local counterparts are

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TABLE 1.1 LIST OF STRATEGIC ALLIANCES/ PARTNERSHIP BETWEEN LOCAL AND FOREIGN BANKS FOR THE MANAGEMENT OF EXTERNAL RESERVES

S/N LOCAL BANK FOREIGN PARTNER

1 Zenith International

Bank PLC

JP Morgan Chase

2 First Bank of Nigeria PLC HSBC

3 IBTC-Chartered Bank PLC Credit Sussie

4 United Bank of Africa PLC UBS AG

5 Intercontinental Bank PLC BNP Paribas of Paris

6 Oceanic Bank PLC Commerzbank AG of

Germany

7 Bank PHB PLC Fortis Group

8 Diamond Bank PLC Crown Agents Investment

Management

9 Ecobank Nigeria PLC ING Belgium Sa

10 Union Bank of Nig PLC Black Rock

12 Access Bank of PLC FMO/ABM AMRO

13 Fidelity Bank PLC Investec Asset Management

14 Stanbic Bank PLC Bank of New York

8.0 INTEREST RATES

The interest rates for major financial instruments during the second half of

2006 are presented in Table 1.2. As shown in the table, rates on most

financial instrument were on the upward movement during the period under

review following hot-up competition amongst the consolidated banks. For

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instance, an analysis of the movement in rates indicated that Call Rate,

Savings Deposit Rates, 7-Day Deposit increased by 0.7, 0.5 and 1.8

percentage points respectively whilst 30-Day and 90-Day Rates also went

up by 1.2 and 3.0 percentage points respectively. Similar increases were

witnessed on 180-Day deposit rates and 360-Day deposit rate. Prime

Lending Rates steadily increased from 17.2 percent as at July to 17.9

percent by the end of December, 2006.

Table 1.2 Average Interest Rates from July- December 2006 Financial Instrument

Rates (%)

Increase/Decrease Between July and December 2006

July 2006

August 2006

September September September September

2007200720072007

October 2006

November 2006

December 2006

Savings

4.2 4.4 4.54.54.54.5 4.3 4.4 4.7 0.5

Call

5.3 5.6 5.95.95.95.9 5.7 5.5 6.0 0.7

7-Day

6.2 6.3 6.76.76.76.7 6.3 6.5 8.0 1.8

30-Day

11.1 11.1 11.311.311.311.3 11.2 13.6 12.3 1.2

90-Day

10.2 10.5 10.810.810.810.8 10.8 13.3 13.2 3.0

180-Day

8.4 8.5 8.8.8.8.5555 8.4 9.0 13.5 5.1

360-Day

9.0 9.0 9.09.09.09.0 9.0 9.5 10 1.0

Prime Lending

17.2 17.6 17.917.917.917.9 17.5 17.7 17.9 0.7

MPR

14.0 14.0 14.014.014.014.0 14.0 14.0 10.0 -4.0

T/Bills Rate

7.0 6.2 6.06.06.06.0 6.1 5.4 6.1 -0.9

FGN Bond

16.0 12 11.511.511.511.5 12.74 10.00 10.00 -6.0

Source: NDIC Market Survey

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Following the introduction of new policy rate, there was a four percentage

points’ decrease in the former anchor rate, MRR, which the new rate

replaced. Rates offered on government bills and bonds also steadily

declined during the period under review obviously due to deliberate efforts

of government to continually bring down rates in the money market.

9.0 THE NAIRA EXCHANGE RATE

A review of developments in the foreign exchange market during the second

half of 2006 revealed that the market exhibited some level of stability just as

obtainable during the first half of the year. Another notable development

was the closing of gaps between the official segment of the market and the

other two segments: the bureau de change and parallel market. The reason

for that positive development could be ascribed to the increased supply of

foreign exchange to the official market and the bureaux de change relative to

the parallel market. In addition, the entry of some banks to the bureau de

change business has also increased the supply in this segment.

The average Naira exchange rate against the US Dollar during the period

under review is presented in Table 1.3. As evidenced in the table, the Naira

depreciated slightly in the Wholesale Dutch Auction Market whilst it

appreciated in the other two segments of the market during the period under

review. The Naira as shown in the table, exchanged at ₦128.295 to a US

dollar at the WDAS in December, 2006 against ₦128.184 to a US dollar in

July, 2006 showing a depreciation of 0.08 percent. In Bureaux de Change,

the Naira appreciated by 1.2 percent as it exchanged for ₦130.375 to a US

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dollar in December, 2006 as against the ₦131.9 to a US dollar witnessed in

the month of July, 2006. At the parallel market the, Naira exchanged for

₦131.00 to one US Dollar in December, 2006, as against ₦132.8 to one US

Dollar that was reported in the month of July, 2006 depicting an appreciation

of 1.4 percent.

Table 3 Average Naira Exchange Rate From July- December 2006

Source

Exchange Rate (x to $1)

% Change in the value of ₦ per US dollar between July and December 2006

July 2006

August 2006

September September September September

2007200720072007

October 2006

November 2006

December 2006

WDAS

128.184

128.475

128.36128.36128.36128.36 128.32

128.29

128.2951

(0.08)

Bureaux De Change

131.9

130.125

129.3129.3129.3129.3 129.00

129.625

130.375

1.2

Parallel Market (PM)

132.8

130.625

129.8129.8129.8129.8 129.8

130.75

131.00

1.4

Source: NDIC Market Survey 10.0 PERFORMANCE OF BANKS QUOTED ON THE NIGERIAN

STOCK EXCHANGE (NSE)

During the period under review, the nation’s capital market recorded the

commencement of trading of Spring Bank Plc’s Shares on the floor of the

Nigerian Stock Exchange (NSE). The listing of the bank on the floor of the

NSE followed the completion of all the necessary integration processes

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among the six (6) merging banks that combined to form Spring Bank PLC.

Those banks included Guardian Express Bank Plc, Omega Bank Plc, Trans

International Bank Plc, Citizens Bank, Fountain Trust Bank and ACB

International Bank Plc.

Presented in Table 1.4 is the performance of the shares of quoted banks on

the floor of NSE as at December 18, 2006 with a comparison of the

previous position as at the end of July. As can be seen in the table, First

Bank of Nigeria Plc still maintained the price leadership position among

quoted banks on the floor of the stock exchange with a quoted share price of

3,200 kobo. United Bank for Africa Plc also occupied the second position

with a quoted price of 2,530 kobo. Other banks that trailed behind included

Zenith Bank Plc, Union Bank of Nigeria Plc, Guaranty Trust Bank Plc,

Intercontinental Bank Plc, Oceanic Bank International Plc and Afribank Nig.

Plc with quoted prices of 2,350kobo, 2,349kobo, 1,835kobo, 1,390kobo,

1,385kobo and 1,151kobo respectively.

Activities at the beginning and end of the period under review showed that

thirteen (13) had upward movements in their share prices as against five(5)

banks that experienced declines in their share prices during same period.

Also, as shown in Table 1.4, 3 out of the 21 banks retained their share prices

on the floor of the NSE. These banks were Spring Bank PLC, Sterling

Bank PLC and Unity Bank PLC. At the close of business on December 18,

2006, Twelve (12) banks closed on bid while three (3) banks closed on offer.

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Table 1.4 Performance of Insured Banks’ Shares on the Nigerian Stock

Exchange (NSE) As At December 18, 2006

BANK

Par value (k)

July, Quotation (k)

December, Quotation (k)

Year=s High (k)

Year=s Low (k)

Earnings P/share (k)

Price/Earning Ratio (%)

ACCESS BANK NIGERIA PLC

50

250 670 -

598

222

0.13

46.00

AFRIBANK NIGERIA PLC

50

698 1151

1151

645

0.51

22.57

DIAMOND BANK NIGERIA PLC

50

471 745

775

432

0.57

10.35

ECOBANK NIGERIA PLC 50 557 499 + 1165 500 0.15 36.73

FIDELITY BANK PLC

50

293 250 +

293

205

0.11

19.18

FIRST BANK OF NIG. PLC

50

6320 3200 +

72.76

3200

1.83

20.21

FIRST CITY MONUMENT BANK PLC

50

427 403 +

548

350

0.30

13.67

FIRSTINLAND BANK PLC 50 516 313 - 7.00 320 0.00 0.00

GUARANTY TRUST BANK PLC

50

1400 1835 +

1900

1193

1.31

13.32

IBTC – Chartered Bank Plc 50 485 710+ 699 431 0.38 18.20

INTERCONTINENTAL BANK PLC

50

1240 1390 +

1613

837

0.99

16.20

OCEANIC BANK PLC

50

949 1385

1590

560

0.65

23.1

PLATINUMHABIB BANK PLC 50 211 322+ 292 189 0.11 21.60

SKYE BANK PLC 50 306 456 306 306 0.06 51.00

SPRING BANK PLC 50 - 716 802 600 - -

STERLING BANK PLC

50

- 490 -

750

280

0.38

16.90

UBA PLC

50

1401 2530 +

2866

1145

1.05

26.10

UNION BANK NIG. PLC

50

2811 2349 +

3250

2390

1.12

21.4

UNITY BANK PLC 50 250 250 262 218 0 0

WEMA BANK PLC

50

209 299+

374

209

0.10

29.50

ZENITH BANK PLC

50

2155 2350 +

2688

1650

1.43

17.10

Source: The Nigerian Stock Exchange, Lagos Key: - = Supply (Offer) + = Demand (Bid)

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FINANCIAL CONDITION AND PERFORMANCE OF INSURED

BANKS IN THE THIRD AND FOURTH QUARTERS OF 2006

BY

RESEARCH & OFF-SITE SUPERVISION DEPARTMENTS

1.0 INTRODUCTION

The condition and performance of the insured banks were mixed during the

period under review. The total assets of the banks increased from N6.23

trillion as at the end of the third quarter to N6.83 trillion as at the end of the

fourth quarter of 2006, representing an increase of 9.63 percent. The

industry’s total loans and advances increased significantly from N1.88

trillion as at the end of September 2006 to N2.08 trillion as at the end of

December 2006. On a similar note, asset quality experienced a slight

appreciation as the proportion of non-performing loans to total credit

declined from 11.73 percent as at the end of the third quarter to 8.07 percent

as at the end of the fourth quarter of 2006. Ditto for, Capital to Risk-

Weighted Asset Ratio which increased marginally by 1.62 percentage points

from 20.95 percent as at the end of September 2006 to 22.57 percent as at

the end of December 2006. The industry’s average liquidity ratio also

increased by 8.63 percentage points from 53.09 percent as at the end of

September to 61.72 percent as at the end of December 2006. However, there

was a decline in the overall profitability of the industry during the period

under review as profit before tax (PBT) which amounted to N41.85 billion

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as at the end of the September 2006 declined appreciably by 40.11 percent to

N29.87 billion as at the end of December 2006.

Apart from this introduction, the rest of the paper is divided into three

sections. Section Two presents the structure of assets and liabilities of the

banking industry, while Section Three examines the financial condition of

insured banks. Section Four concludes the paper.

2.0 STRUCTURE OF ASSETS AND LIABILITIES

The total assets of the banking industry increased from N6.23 trillion as at

the end of third quarter of 2006 to N6.83 trillion as at the end of the fourth

quarter of 2006. The structure of banks’ total assets and liabilities as at the

end of the third and fourth quarters of 2006 are presented in table 1 and

further illustrated by Charts 1 (a) and 1 (b).

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TABLE 1 STRUCTURE OF BANKS’ ASSETS AND LIABILITIES AS AT THE END OF SEPTEMBER AND DECMBER 2006 Assets (%)

3rd Quarter

4th Quarter

Liabilities (%)

3rd

Quarter

4th Quarter

Cash & Due from Other Banks

25.18

31.56

Deposits

61.58

50.52

Inter-bank Placement 4.01 1.98 Inter-bank Takings

1.11

0.83

Government Securities

17.76

15.36

CBN Overdraft

0.00

0.78

Other Short-term Funds

4.77

3.85

Due to Other Banks

1.00

9.23

Loans & Advances

30.20

30.48

Other Borrowed Funds

0.89

0.00

Investments 7.22 6.31 Other Liabilities 19.25 21.33 Other Assets 6.94 6.59 Long-term Loans 0.86 0.96 Fixed Assets

3.92

3.88

Shareholders’ Funds (Unadjusted)

2.64

3.57

Reserves 12.67

12.78

Total 100.00 100.00 Total 100.00 100.00* Source: Bank Returns NOTE: TOTAL ASSETS (=N= TRILLION) 3RD QUARTER OF 2006 6.23 4TH QUARTER OF 2006 6.83 OFF-BALANCE SHEET (As a Proportion of Balance Sheet Items) 22.23% 19.23%

18

0

5

10

15

20

25

30

35

3rd Quarter 4th Quarter

CHART 1 A: STRUCTURE OF BANKS' ASSETS FOR THE 3RD AND 4TH QUARTERS OF 2006

Cash & Due from Other Banks Interbank Placements Government SecuritiesOther Short-term Funds Loans & Advances/Leases InvestmentsOther Assets Fixed Assets

19

0

10

20

30

40

50

60

70

3rd Quarter 4th Quarter

CHART 1 B: STRUCTURE OF BANKS' LIABILITIES FOR 3RD AND 4TH QUARTERS OF 2006

Total Deposits Interbank Takings CBN OverdraftsDue to Other Banks Other Borrowed Funds Other LiabilitiesLong-term Loans Shareholders' Funds (Unadjusted) Reserves

The largest proportion of total assets during the period under review was

Loans & Advances; in the third quarter it accounted for 30.20 percent but

increased only marginally by 0.28 percentage points to 30.48 percent as at

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the end of the fourth quarter. The relative share of Cash & Due from Other

Banks increased from 25.18 percent as at the end of September 2006 to

31.56 percent as at the end of December 2006, which represented an

increase of 6.38 percentage points. Thus, it retained its position as the

second largest component of total assets. Government Securities which

constituted 17.76 percent of total assets in the third quarter of 2006

maintained its third position on the log. However, its relative contribution

declined by 2.40 percentage points to 15.36 percent in the fourth quarter but

still maintained its position as the third largest component of total assets.

Other components of the banking industry’s assets whose relative

contributions declined in the fourth quarter of 2006 compared to the

situation in the third quarter of 2006 were Inter-Bank Placements which

declined from 4.01 percent in the third quarter to 1.98 percent in the fourth

quarter; Other Short-term Funds declined from 4.77 percent in the third

quarter to 3.85 in the fourth quarter and similarly Investments also declined

from 7.22 percent in the third quarter to 6.31 percent in the fourth quarter. In

the same vein, Other Assets declined from 6.94 percent in the third quarter

to 6.59 percent in the fourth quarter and so also Fixed Assets which

decreased from 3.92 percent in the third quarter to 3.88 percent in the fourth

quarter.

On the liabilities side of the balance sheet, Deposits which accounted for

61.58 percent of the total as at the end of September 2006 experienced a

significant decline of 11.06 percentage points as at the end of December,

2006. Thus, as at the end of the period under review, deposit liabilities

accounted for about half of the total liabilities of the banking system. The

second largest liability of the banking industry as at the end of December

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2006 was Other Liabilities which accounted for 21.33 percent. A

significant development on the liability side of banks’ balance sheet during

the period under review was the pronounced increase in Due From Other

Banks which jumped from 1 percent as at the end of third quarter to 9.23

percent as at the end of the fourth quarter. That development showed that

banks are beginning to rely on borrowed funds as a reliable source of funds.

That was 2.08 percentage points higher than its contribution in the third

quarter. Other sources of funding in the industry during the fourth quarter of

2006 included the following: Inter-bank Takings (0.83%); Long-term

Loans (0.96%); Shareholders’ Funds (3.57%) and Reserves (12.78%).

3.0 ASSESSMENT OF THE FINANCIAL CONDITION OF INSURED

BANKS

3.1 Asset Quality

During the period under review, the quality of banks’ assets experienced a

slight increase. Table 2 and Chart 2 present the indicators of insured banks’

asset quality for the third and fourth quarters of 2006. Non-performing

Loans declined by 5.96 percent from N239.34 billion in the third quarter to

N225.08 billion in the fourth quarter of 2006. Thus, the proportion of Non-

performing Credit to Total Credit also decreased from 11.73 percent at the

September 2006 to 8.07 percent at the end of December 2006. In addition,

the proportion of Non-performing Loans to Shareholders’ Funds also

declined from 28.59 percent as at the end of the third quarter to 22.81

percent as at the end of the fourth quarter of 2006.

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TABLE 2

INDICATORS OF INSURED BANKS’ ASSET QUALITY FOR THE THIRD AND FOURTH QUARTERS OF 2006

Asset Quality Indicator (%)

Industry 3rd Quarter of 2006

4th Quarter of 2006

Non-performing Credit to Total Credit

11.73

8.07

Provision for Non-performing Loans to Total Non-performing Credit

82.89

103.15

Non-performing Credit to Shareholders’ Funds

28.59

22.81

Source: Bank Returns

23

0

20

40

60

80

100

120

3rd Quarter 4th Quarter

CHART 2: INSURED BANKS' ASSET QUALITY FOR THE 3RD AND 4TH QUARTERS OF 2006

Non-performing Credit to total CreditProvision for Non-performing Loans to non-performing CreditNon-performing Credit to Shareholders' Funds

3.2 Earnings and Profitability

The banking industry recorded a decline of 11.9 percent in Interest Income

from N129.71 billion at the end of third quarter to N114.27 billion in the

fourth quarter of 2006. Non-Interest Income, however, increased slightly

from N58.92 billion in the third quarter to N59.29 billion in the fourth

quarter of 2006. During the same period, Operating Expenses declined

from N101.18 billion to N95.85 billion. In spite of the decline in cost, total

24

profit before tax (PBT) of the banking industry declined significantly from

N41.85 billion as at September 2006 to N29.87 billion as at end of the fourth

quarter of the same year due partly to the reduced interest income. Table 3

and Chart 3 present the Earnings and Profitability Indicators for the third

and fourth quarters of 2006.

TABLE 3 EARNINGS AND PROFITABILITY INDICATORS FOR THE THIRD AND FOURTH QUARTERS OF 2006 Earnings/Profitability Indicator

Industry 3rd Quarter

4th Quarter

Return on Assets (%)

0.67

0.44

Return on Equity

5.00

3.03

Yield on Earning Assets (%)

3.17

4.17

Profit Before Tax (=N= Billion)

41.85

29.87

Interest Income (=N= Billion)

129.71

114.27

Operating Expenses (=N= Billion)

101.18

95.85

Non-Interest Income (=N= Billion)

58.92

59.29

Source: Bank Returns

25

0

10

20

30

40

50

60

3rd Quarter 4th Quarter

CHART 3: INSURED BANKS' EARNINGS AND PROFITABILITY FOR 3RD AND 4TH QUARTERS OF

2006

Return on Assets Return on Equity

Yield on Earning Assets Net Interest Margin

As shown in the table, the industry Return on Assets (ROA) declined by 23

basis points from 0.67 percent in September to 0.44 percent in December

2006. Similarly, Return on Equity (ROE) also declined from 5.00 percent

as at the end of September to 3.03 percent as at end of December 2006.

However, Yield on Earning Assets (YEA) witnessed an appreciation of

1.00 percentage point from 3.17 percent as at the quarter to 4.17 percent as

at fourth quarter of 2006.

3.3 Liquidity Profile

26

The industry average liquidity ratio for the industry was far higher than the

40 percent minimum regulatory requirement during the period under review.

In fact as shown Table 4, it increased from 53.09 percent during the third

quarter to 61.72 in the fourth quarter of the year.

TABLE 4 INDICATORS OF INSURED BANKS’ LIQUIDITY PROFILE FOR THE THIRD AND FOURTH QUARTERS OF 2006 Liquidity

Period 3rd Quarter of 2006

4thQuarter of 2006

Average Liquidity Ratio (%)

53.09

61.72

Net Loans to Deposit Ratio (%)

49.05

74.10

Inter-bank Takings to Deposit Ratio (%)

1.61

1.28

No. of Banks with Liquidity Ratio of Less than the prescribed 40%

5

3

Source: Bank Returns From Table 4, it can be observed that the industry slightly increased its

dependence on inter-bank takings as the ratio of Inter-bank Takings to

Deposits declined by 0.33 percentage points from 1.28 percent as at

September to 1.61 percent at the end of December 2006. The number of

banks that could not meet up with the liquidity ratio of 40 percent prescribed

27

by the regulatory authorities increased from 3 in the third quarter to 5 as at

the end of December 2006.

3.4 CAPITAL ADEQUACY

On the aggregate, the banking industry remained adequately capitalized as at

the end of the fourth quarter of 2006. The average Capital to Risk Weighted

Assets Ratio far exceeded the required minimum of 10 percent. Thus, the

industry required no additional capital. Table 5 and Chart 4 below show

insured banks’ capital adequacy positions as at the end of September and

December 2006.

TABLE 5

INDICATORS OF INSURED BANKS’ CAPITAL ADEQUACY POSITION FOR THE THIRD AND FOURTH QUARTERS OF 2006. Capital Adequacy Indicator

Period 3rd Quarter of 2006

4th Quarter of 2006

Capital to Risk weighted Asset Ratio (%)

20.95

22.57

Capital to Total Asset Ratio (%)

14.73

14.94

Adjusted Capital to Loan Ratio (%)

49.11

38.08

Source: Bank Returns

28

0

10

20

30

40

50

3rdQuarter

4thQuarter

CHART 4: INSURED BANKS' CAPITAL ADEQUACY FOR 3RD AND 4TH QUARTERS OF 2006

Capital to Risk Weighted Asset RatioCapital to total Asset RatioAdjusted Capital to Loan Ratio

The Capital to Risk Assets Ratio increased from 22.05 percent as at the

end of September to 22.57 percent as at the end of December 2006.

Similarly, the Ratio of Capital to Total Assets for the industry increased

slightly from 14.73 percent in September to 14.94 percent in December

2006. However, the Adjusted Capital to Loan Ratio declined too 49.11

percent as at the end of the third quarter to 38.08 percent as at the end of the

fourth quarter of 2006.

29

4.0 CONCLUSION

The overall financial condition and performance of the insured banks during

the second half of 2006 were mixed. The total assets of the industry

increased during the period under review, while there was a significant

decrease in earnings and profitability.

30

POST-CONSOLIDATION BANKING ERA AND THE NIGERIA

DEPOSIT INSURANCE CORPORATION: ISSUES AND

CHALLENGES****

BY

MR. G.A. OGUNLEYE, OFR,

MANAGING DIRECTOR/CHIEF EXECUTIVE OFFICER, NDIC

This year’s workshop is the fifth in the series organized for members of the

Financial Correspondents Association of Nigeria (FICAN) and their

business editors by the Nigeria Deposit Insurance Corporation (NDIC). The

workshop is an assurance of the fact that the Corporation remains resolutely

committed to the goal of further enriching and enhancing the capacity of

financial reporters to enable them adequately cope with the ever increasing

challenges of their profession.

The theme for this year’s workshop - “Post-Consolidation Banking Era and

the Nigeria Deposit Insurance Corporation”- is considered apt in view of the

peculiar role of the NDIC in contributing to banking system stability.

Gentlemen of the press, let me take this opportunity to make some

comments on deposit insurance system (DIS). DISs are set up in many

jurisdictions mainly to enhance macro-economic and financial stability by

minimising or preventing incidences of bank runs. This is done through an

up-front promise to pay depositors a guaranteed sum should a bank fail. The

* Original version of this paper was delivered as a Keynote Address at the fifth NDIC- sponsored FICAN Workshop which was held from 28th to 30th November, 2006 in Benin City, Edo State.

31

primary objective of such promise is to build confidence in the banking

system. The actual pay-out to depositors in the event of bank failure is a

secondary objective which serves to reinforce the primary objective of

building confidence. As long as the public believes in the ability and

capability of the deposit insurer to fulfill its promise, the financial stability

objective is met.

Basically, there are three models of the DIS namely the pay-box, least-cost

and risk minimiser. The pay-box is saddled with payout to depositors of

failed banks while the least-cost DIS seeks to minimise the cost of bank

resolution. In the case of a risk minimiser DIS, a continuous assessment of

insured institutions is made in order to monitor the risk exposure of the

deposit insurer. In this regard, it should be noted that the Nigerian DIS was

designed as a risk minimiser. Hence, its enabling Act gave it the power to

supervise insured institutions. It is widely acknowledged that NDIC’s

supervisory activities have effectively complemented the regulatory function

of the CBN.

Distinguished audience, you will recall that two major products of the bank

consolidation programme were the emergence of 25 bigger banks and the

revocation of the operating licences of 14 technically insovent banks that

could neither raise the minimum capitalization requirement of N25 billion

nor find merger partners/acquirers. In order to minimize the sufferings of

innocent depositors of the 14 failed banks and boost confidence in the

banking system, the Regulatory Authorities (i.e. CBN and NDIC), adopted

the Purchase and Assumption (P & A) failure resolution option as against

the pay-out option which the Corporation had adopted over the years. Under

32

the new option, the depositors, particularly the private sector depositors are

guaranteed full recovery of their deposits and would enjoy continuity of

banking services as the acquiring banks of the closed banks would meet the

banking obligations of the affected depositors as and when due.

The emergence of 25 banks of more comparable sizes than the 89 banks that

hitherto existed at the commencement of the reform agenda in July 2004 has

created a level playing field for keen competition amongst market

participants.

Whereas, competition is good for individual banks, the customers, and the

banking system, increased competition has implications which should be

carefully identified and accorded the necessary attention. In a broad sense,

some of the implications of increased competition in the banking industry,

which have direct bearing on the system’s stability include the following,

among others:

Ø Effective supervision;

Ø Effective risk management;

Ø Strong corporate governance;

Ø Market discipline;

Ø Self-regulation; and

Ø Enabling legal and judicial environment.

Each of these implications is briefly discussed hereunder.

33

Effective Supervision

The current supervisory approach in Nigeria which is transaction- and

compliance-based is narrow in scope and uniformly applied to all supervised

institutions. With consolidation, there is the need to adopt a robust,

proactive and sophisticated supervisory process that should essentially be

based on risk profiling of the emerging big banks. In other words, the

adoption of an appropriate risk-based supervisory approach is imperative

with consolidation. The approach entails the design of a customized

supervisory programme for each bank and it should focus more attention on

banks that are considered to have potentially high systemic impact. The

approach should enable the supervisory authorities to optimize the utilization

of supervisory resources. That necessarily requires that supervisors should

have a clear understanding of the risk profile of the emerging big, and

sometimes, complex banks. There is therefore, the need for capacity

building in this area.

Furthermore, consolidation has, no doubt, brought to the fore the need for

consolidated supervision that requires more regular consultation and closer

cooperation amongst the various regulatory/supervisory institutions in the

financial system. This is because the larger banks are going to be more

complex as they are likely to engage in non-traditional activities that are

permissible under universal banking. It is equally imperative that the present

reporting format of banks be reviewed so as to incorporate all possible

activities that banks would undertake under after the consolidation. This

will make it possible for supervisors to obtain a global view of the bank’s

operations. The current efforts of the CBN/NDIC in the development of an

34

electronic Financial Analysis Surveillance System (e-FASS) and the

activities of the Financial Services Regulation Coordinating Committee

(FSRCC) would go a long way to assist in this regard.

Effective Risk Management Systems

Although effective risk management has always been central to safe and

sound banking practices, it has become even more important in the post

consolidation banking era than hitherto as a result of the on-going bank

consolidation programme. It is important to indicate that the ability of a

bank to identity, measure, monitor and control risks under the emerging

banking environment can make the critical difference between its survival

and collapse. For a bank to efficiently and effectively play its role under the

emerging dispensation therefore, the deployment of an effective risk-

management system with the following key elements is imperative:

o Active board and senior management oversight:

o Adequate risk-management policies, procedures and exposure limits;

o Effective risk identification, measurement, monitoring and control

framework;

o Comprehensive management information system; and

o Efficient internal controls.

It is on the basis of the foregoing that the Regulatory Authorities recently

issued guidelines for the development of risk management systems by banks.

The adequacy or otherwise of the developed risk management systems will

be assessed on an on-going basis by the Regulatory Authorities (i.e. CBN

and NDIC).

35

Strong Corporate Governance

While good corporate governance has remained imperative in the banking

system, its importance in our nation’s emerging banking environment is

based on the fact that managements of most of the ‘new’ banks would be

insulated from abusive ownership. Besides, there are many other

stakeholders with goals, interests and expectations that do not necessarily

coincide, and as a result, they constitute major areas of frictions. A bank is

therefore expected to put in place a governance structure that will seek to

balance all stakeholders’ interest, goals and expectations. This is the essence

of a good corporate governance.

Corporate governance is about building credibility, ensuring transparency

and accountability as well as maintaining an effective channel of

information disclosure that would foster good corporate performance. It is

also about how to build trust and sustain confidence among the various

interest groups that make up an organization. Indeed, the outcome of a

survey by Mckinsey and Company in collaboration with the World Bank in

June 2000 attested to the strong link between corporate governance and

investors’ confidence. In fact, it has been amply demonstrated that, with the

possible exception of massive macroeconomic instability, no one single

factor contributes more to institutional problems than poor corporate

governance.

Disclosure and transparency are key pillars of a corporate governance

framework, because they provide all the stakeholders with the information

necessary to judge whether or not their interests are being served. I see

transparency and disclosure as an important adjunct to the governance

36

process in banks as they facilitate banking sector market discipline. For

transparency to be meaningful, information should be reliable, accessible,

timely, relevant and qualitative.

With the emergence of bigger banks in Nigeria, weak or poor corporate

governance become more serious issues as the failure of large banks could

cause systemic problems while posing operational difficulties to the

supervisory authorities in resolving them. In view of the fact that the

systemic repercussion of the failure of a big banking institution is grievous,

the Regulatory Authorities recently issued a new code of corporate

governance tagged “Code of Corporate Governance for Banks in Nigeria:

Post Consolidation”. The new code was developed to compliment the

earlier ones and ensure the enthronement of responsive corporate

governance in the banking industry.

Market Discipline

The current information disclosure requirements in the industry are grossly

inadequate to effectively bridge the information asymmetry between banks

and investing public that consolidation has inevitably created. Under the

consolidated banking environment, it is important that the accounting as well

as disclosure requirements of the consolidated banks be reviewed. In that

regard, the Regulatory Authorities are currently reviewing information

disclosure requirements so as to minimize information asymmetry between

banks and investing public. This has become necessary to ensure that

business decisions by the investing public are well informed under the new

dispensation. Adequate information disclosure requirement will make banks

37

to pay greater attention to reputational risk that could result in loss of

confidence as well as patronage. As a necessary step to promote market

discipline, it is important to indicate that the full weight of the provisions of

relevant laws would be brought to bear on erring operators in order to help

promote safe and sound banking practices under the consolidated banking

environment. The policy of zero-tolerance against unethical behaviour

would be strictly applied.

Self-Regulation and Self-Discipline

Given the size and the envisaged complexity of operations of the emerging

banks post-consolidation, regulation and supervision of banks have been

made the joint responsibility of both the Regulators and operators. That is,

statutory regulation has been complemented by self-regulation through

strong corporate governance arrangement. This development has become

necessary in view of the realization that self-regulation and self-discipline

are critical to the promotion of a sound, transparent, accountable and

efficient financial market.

Given our conviction on the efficacy of self-regulation, the Regulatory

Authorities will continue to encourage banking institutions in a consolidated

banking environment to draw up and bind all their staff to a code of ethical

and professional practices. Effective self-regulation requires probity,

transparency and accountability, which are yet to be fully entrenched in the

system. Necessary steps are being taken by the regulatory/supervisory

authorities to encourage these virtues and operators have also appreciated

the need for compliance with rules and regulations to promote healthy

competition since self-regulation does not amount to elimination of

38

regulatory controls and supervision. It only confers some measure of

confidence and trust in the ability of organizations to regulate themselves in

the public interest. In this regard, it is noteworthy that the Bankers’

Committee had issued a code of Ethics and Professionalism to guide their

officers and employees in discharging their duties. Also, Committees such

as Board of Ethics and Good Governance are becoming a regular feature of

the Board Structure of Nigerian Banks.

Responsive Legal and Judicial Environment

Ladies and gentlemen, without an effective legal and judicial process, the

effectiveness of the Corporation in its bid to contribute to the banking

system stability would be severely impaired. As the deposit insurer, NDIC

requires a responsive legal and judicial system to enhance its effectiveness.

Adequate legal powers for the Corporation will facilitate prompt payment of

insured depositors and guarantee speedy debt recovery and realisation of

assets in the event of bank failure as well as minimize losses to the Deposit

Insurance Fund (DIF). In this regard, I am happy to indicate that the

Corporation’s proposed amendments to its enabling Act have been passed by

the National Assembly and it is awaiting Presidential assent. It is my belief

that the new Bill, when signed into law, will enhance the Corporation’s

ability to execute its mandate.

With regard to the judicial environment, it is on record that most lawyers

exploit the subsisting judicial processes and procedures to cause undue delay

in the dispensation of justice when they know they have bad cases. Most of

the times you witness lawyers obtain ex-parte orders from courts, these are

39

orders sought without putting the other party on notice for frivolous reasons.

In most instances, interim and interlocutory injunctions, stay of proceedings

are obtained only to stall proceedings. Also, frivolous appeals and other

forms of abuse of court processes are some of the tactics employed by

lawyers to pervert the cause of justice. A good example of abuse of judicial

process is the Savannah Bank’s case, where the plaintiff who went to court

to stop the liquidation of the bank after the Central Bank of Nigeria (CBN)

had revoked its operating licence in 2002 had kept prolonging or delaying

the proceedings through various types of applications in court. It was only

in September this year that the Federal High Court dismissed the case

against the plaintiffs who have again filed an appeal in the Appeal Court.

The litigation instituted by the erstwhile owners of the failed Lead bank

whose licence was revoked in 2003 also still remains in court.

Again, out of the 14 banks whose licenses were revoked in January 2006,

following the bank consolidation programme of the Federal Government, the

Corporation has to date been appointed liquidator of only 8 of the banks and

provisional liquidator of 3. The owners of the remaining 3 closed banks are

currently challenging the revocation of their licenses in court, thereby

frustrating the process of paying the affected depositors by the Corporation.

It is in recognition of the importance of an effective legal and judicial

environment to its activities that the Corporation’s 20006 Depositors’

Awareness Week, which took place last week, focused on legal and judicial

issues as they affect the Corporation. There is therefore an urgent need to

ensure smooth administration of justice through the reform of judicial

process in order to enhance the effectiveness and relevance of the DIS in

40

Nigeria.

Ladies and gentlemen, the issues to be addressed in this workshop by the

various resource persons and our honourable selves attest to the timeliness of

the workshop. Together with other stakeholders like you, we shall continue

to be proactive and react to new challenges in the banking sector and

regulatory environment as they unfold. As a safety net player in the

international financial system, the Corporation will continue to collaborate

with the Central Bank of Nigeria and other stakeholders in ensuring the

safety and soundness of the nation’s banking system.

Finally, as we look forward to stimulating deliberations over the next two

days, I urge all participants and resource persons to give their best in

addressing the various topics listed for consideration. The success of this

workshop will, no doubt, depend on the constructive contributions of all. It

is my sincere hope that you will find your stay with us worthwhile and

enjoyable.

Thank you for your kind attention.

41

LEGAL ISSUES IN BANK LIQUIDATION****

Mr. A. B. Nyako

Board Secretary/Director, Legal Department

INTRODUCTION

The topic for discussion – Legal Issues in Bank Liquidation- is indeed a very

relevant one, not only because bank liquidation is one of the major

operational pre-occupation of the Corporation today, but more importantly

because the performance of the liquidation functions is fraught with a

number of legal issues and challenges some of which we would discuss

shortly.

As you may be aware, as at today, there are about 50 banks at various stages

of liquidation. More than 50% of the banks concerned challenged the

liquidation process ab initio, while 10 of them are still in Court challenging

the revocation of their banking licenses and the liquidation process.

Meanwhile, even with regard to the banks where full liquidation had

commenced, there are over 2000 legal cases which had been referred to

Solicitors for necessary action, most of which relate to the recovery of debts.

Over 1000 of the cases are already a subject of litigation. No wonder then

that liquidation was described as being synonymous with litigation. As you

would observe, the liquidation process commences and terminated through

litigation process.

* Original version of this paper was delivered at the Fifth NDIC-sponsored FICAN Workshop held from 28th to 30th November, 2006 in Benin City, Edo State

42

A workshop like this therefore, would provide the opportunity to explain the

bank liquidation process and the legal issues involved, with the view to

appreciating why there are usually delays in the process. These delays and

other bottlenecks quite often frustrate the objective of the Corporation to

settle claims of depositors and other creditors of failed banks promptly. This

workshop is a very important for stakeholders with critical role to play in

terms of enlightening the public about the liquidation process. It would also

enable the participants appreciate the constraints and challenges faced as

well as the tremendous efforts being made by the Corporation to discharge

its functions effectively notwithstanding the challenges. No doubt, NDIC

perceives you as worthy partners in progress: a partnership that is

continuously being strengthened by the annual FICAN workshops that has

brought us here today.

The presentation has been structured into the following five sections: the

introduction (Section 1), definition, principles and the law (Section 2), the

liquidation process (Section 3), legal issues (Section 4) and conclusion

(Section 5).

2.0 DEFINITION, PRINCIPLES AND LAW

The Black’s Law Dictionary defines liquidation as “winding up or settling

with creditors and debtors”. On the other hand Webster’s encyclopedia

dictionary of the English Language defined liquidation as “the process of

realizing upon assets and discharging liabilities in concluding the affairs of a

business, etc”. Following from the above therefore, in the case of a bank,

liquidation describes the process of realization of assets (conversion to cash)

43

and the distribution of same to those who are entitled to receive them,

namely; the depositors, other creditors and possibly the shareholders.

The foundation of the principles governing liquidation is traced to the

concept of corporate personality. The principle of corporate personality had

established that once a company was incorporated either by statute or

through registration with the Corporate Affairs Commission (CAC) pursuant

to the provisions of the Companies and Allied Matters Act, it acquires a

separate and distinct legal personality. Being a juristic person, it enjoys

almost all the benefits accruable to a natural person, including the right to

own properties, incur liabilities, sue and be sued in its corporate name before

a court of law. Therefore, just as the life given to a natural person by God is

protected by the Constitution from extermination except through due process

of law, the life given to the company or corporation cannot be extinguished

except in accordance with due legal process. To do otherwise would amount

to “corporate homicide”.

Consequently, since a bank must first be incorporated as a corporate entity

through registration with the CAC, before seeking for a banking license

(permit to carry on banking business) it enjoys all the attributes of a

corporate entity. Therefore, the mere revocation of the banking license,

while it terminates the bank’s ability to carry on any banking business, it

does not per se extinguish the life of the bank as a corporate person.

Furthermore, it does not automatically remove the Board and Management

of the bank from office or affect the status of employment of the staff. It is

for the above reasons that the process of liquidation (also known as winding

44

up) which is the appropriate mechanism prescribed by law for bringing the

affairs of the bank to an end must be followed.

In Nigeria, the applicable laws regulating the process of liquidation of a

Bank are:

· the Banks and Other Financial Institutions Act (BOFIA) 1991 (as

amended);

· the Nigeria Deposit Insurance Corporation Act 1988 (NDIC Act),

· the CAMA 1990 (as amended) and the Winding Up Rules, and:

· the Failed Banks Act 1994 (as amended),

With the above background in mind, it would now be quite appropriate to

examine the bank liquidation process in Nigeria and as much as possible

highlight the significant legal issues involved.

3.0 LIQUIDATION PROCESS

For convenience of discussion, the liquidation process could be classified

into the following three flexible stages: Pre-closing, Closing and Post

Closing processes.

3.1 Pre-Closing Process

The Pre-closing process describes the range of activities and decisions

that take place prior to the closure of a bank for the purpose of

liquidation. The major event at this stage is the revocation of the

banking license of a bank. However, prior to the revocation of a

bank’s license there would have been sequence of events including the

occurrence of ground(s) of revocation, the discovery of same by the

45

regulatory authorities, adoption of various regulatory measures to

address the problem and non responsiveness of the target bank(s).

The power to revoke the license of a bank is vested in the Central

Bank of Nigeria by the BOFIA. The power is, however, not absolute

as the enabling statute had prescribed the grounds upon which the

power could be exercised, as well as the procedure for exercising

same. Section 12 of the Act listed the grounds on which the CBN

may revoke a bank’s license as follows:

i) Ceasing to carry on in Nigeria the type of banking business for

which it was licensed for any continuous period of 6 months or

any period aggregating 6 months during a continuous period of

12 months

ii) Going into liquidation or is wound up or dissolved

iii) Failure to fulfill or comply with any condition subject to which

the license was granted

iv) Insufficient assets to meet the liabilities (insolvency)

v) Failure to comply with any obligation imposed upon it by or

under the Act or the CBN Act.

Section 9 of the BOFIA provides that the Central Bank of Nigeria

(CBN) shall from time to time determine the minimum paid up share

capital requirement of licensed banks and any failure to comply within

the specified period shall be a ground for the revocation of the bank’s

license. In addition, under Section 14 of the Act, non compliance

with the prescribed capital ratio is a ground for revocation of the

46

license of a bank. In this case however, the CBN is required to give

30 days notice of its intention to revoke the license of the bank.

Furthermore, Sections 33 – 35 of the BOFIA provide series of steps to

be taken by the CBN and NDIC to address the problems of a failing

bank. These steps range from imposition of holding actions by the

governor of the CBN to the handing over of the bank to the

Corporation for closure, supervision and management (intensive care).

However, in the event that the failing bank over which the

Corporation may recommend amongst other resolution measures that

the bank’s license be revoked (Section 36 of BOFIA).

For the revocation of a bank’s license to be effective under Section 12

of the BOFIA it must receive the approval of the Board of Directors

of the CBN, it must be by way of an order in writing, and the notice of

the revocation must be published in the Official Gazette of the Federal

Republic of Nigeria. Failure to fulfill the above requirements could

provide grounds for challenging CBN’s action.

It is significant to note that despite the multiplicity of the grounds for

the revocation of the license of a bank, the dominant basis for the

revocation of the licenses of the 50 closed banks was insolvency.

This underscores the fact that the resort to revocation of license is

usually a last resort distress resolution measure. It is adopted where

the shareholders and boards of the banks concerned fails to adhere to

persistent calls for the recapitalization of their banks.

47

Be that as it may, the revocation of the license of a bank disqualifies it

from carrying on banking business and effectively terminates the

object of its incorporation and business substratum. In other words,

the basis of its existence has been extinguished hence the natural

consequence would be to close the bank preparatory to its winding up.

3.2 Closing Exercise

Where the decision to close a bank has been taken, necessary

approvals for the action obtained and documentary instruments have

been prepared, the process of carrying out an orderly closure of the

bank would be put in place by the Corporation. There are three main

activities that are of great legal significance, namely: the filing of a

petition for winding up, appointment of liquidator and the closing

exercise.

a) Filing of Winding Up Petition

Immediately after the revocation of a bank’s license, a winding up

petition must be filed before the Federal High Court for a winding up

order. Section 38 of BOFIA provides that where the license of a bank

has been revoked the NDIC shall apply to the Federal High Court

(FHC) for a winding up Order of the affairs of the bank.

In the past, there was a doubt as to whether; the Corporation had the

power to file a petition for winding up in view of the provisions of

CAMA which prohibits a corporate body from acting as liquidator.

With the clear provisions of Section 38 of BOFIA which enjoys

48

supremacy over the CAMA in case of any inconsistency, it is beyond

doubt that the Corporation is empowered to file a petition for winding

up a bank whose license has been revoked. In any case the NDIC

Bill, this had been passed by the National Assembly and awaiting the

President’s assent, has even put the matter beyond any shadow of

doubt.

It is significant to note that once the petition for winding up had been

filed, the liquidation process is deemed to have commenced with the

attendant consequences which would be discussed shortly.

b) Appointment of NDIC as Liquidator

Prior to the amendment of the BOFIA in 1998 and 1999, the principal

Act (BOFIA 1991) had empowered the Governor of the CBN to

appoint the Corporation as the Provisional Liquidator of a bank whose

license had been revoked, if he considered it in the public interest to

do so. Such appointment was deemed to have been made by the

Federal High Court. Consequently, whenever the Governor revoked a

bank’s license, he invariably also appointed the Corporation as the

Provisional Liquidator enabled it to immediately take over the control

of the target bank and organize its closure even before filing a petition

to formally obtain a winding up order and confirm its status as the

Liquidator rather than the provisional status conferred by the CBN.

Under the provisions of the CAMA, until the Court grants a winding

up order, the status of the liquidator would remain as provisional.

Nevertheless, the appointment of the Corporation as Provisional

Liquidator by the CBN was very instrumental to the ability of the

49

Corporation to take control and expeditiously organize the bank’s

closing exercise.

However, the power given to the Governor of CBN to appoint the

Corporation as Provisional Liquidator was removed inadvertently

during the amendment of the BOFIA in 1999. The current provisions

of the BOFIA merely stated that the Corporation should file a petition

for winding up of a bank whose license had been revoked and made

no provision with regard to the appointment of a provisional

liquidator. The unfortunate implication of this inadequacy is that the

Corporation would have filed a specific application before the Federal

High Court for its appointment as provisional liquidator.

Furthermore, since the application is entirely regulated by the

provisions of CAMA, all the detailed procedure guidelines prescribed

by the Winding Up rules designed for ordinary trading companies

must be followed. For example, one of such rules provides that an

application for appointment as Provisional Liquidator would be filed

only after the advertisement of the Winding up petition. In other

words, once the banking license is revoked and the Corporation files a

petition for the bank’s winding up, the Corporation is required to wait

until it had obtained the order to advertise the petition, and actually

advertise the petition before it could be eligible to file the application

for appointment as Provisional Liquidator. The question then is who

takes charge of the bank during the long interval between the time of

the revocation of the bank’s license and the time the Corporation’s

application for appointment as provisional liquidator was heard and

granted?

50

This problem was practically demonstrated in the case of Savannah

Bank where the Court of Appeal quashed the appointment of the

Corporation as Provisional Liquidator of the bank which was made by

the Federal High Court on Monday February 18, 2002 following the

revocation of the bank’s license on Friday 15, February 2002. In the

considered opinion of the court of Appeal, the appointment of the

Corporation should not have been made earlier than in March 2002,

by which time the petition for the winding up of the bank had been

advertised. Ironically, by the time the Court of appeal was setting

aside the appointment of the Corporation (sometime in 2003) the

advert of the winding up petition which was the sole ground of its

decision had already been done one year earlier. It is significant to

note that the fresh application made by the Corporation for

appointment as Provisional Liquidator of Savannah Bank has been

pending at the Federal High Court since 2003. That is why as at

today, the bank is practically under the custody and care of the Police

and not the regulatory agencies. The same position applied in the case

of the defunct Peak Merchant Bank Limited where the Corporation’s

application for appointment as liquidator has been pending in Court

since February 2003.

The good news, however, is that the NDIC Bill has made provisions

which addressed the above concerns. The objective of the amendment

was to enable the Corporation assume immediate control of a bank

whose license had been revoked and thereby organize its orderly

closure and subsequent liquidation. However, while a waiting the

51

coming into effect of the proposed amendments, the regulatory

authorities have adopted other remedial measures to mitigate the

effect of the current inadequacies in the law. For instance, the

Corporation could rely on its power of bank examination to access

records of closed banks. Furthermore, CBN and NDIC could rely on

their powers to change or take over the management of distressed

banks prior to the revocation their licenses as was the case for the 14

banks whose licenses were revoked pursuant to the consolidation

programme. The Boards of the 14 banks had been removed and

Interim Management Committees (IMCs) were appointed to take over

from them before their license were revoked.

c) The Closing Exercise

The closing exercise represents the process of the physical takeover of

control of the affairs of a bank whose license had been revoked;

securing its premises, assets and records; the preparation of the

statement of affairs and drawing up of a closing report which contains

the details of the position of the assets and liabilities of the closed

bank as at the closing date. It is during this period that the deposit

register is compiled (details of depositors and the amounts due to

them including the insured portion), the list of debtors and their

liabilities including investments are ascertained. In short, the essence

of the closing exercise is to determine the banks net worth with

supporting details that would form the basis of post closing liquidation

activities.

52

The closing date is a very significant deadline because it becomes the

cut off or reference period for the entire liquidation operation. The

closing date represents the final date for determination of what is due

to depositors and other creditors and what is due from debtors. Any

liability that accrues against the closed bank after the closing date is

deemed to be post closing expenditure and treated as liquidation

expense payable from available funds. On the other hand, liabilities

of the closed bank that had accrued prior to the closing date are

deemed as pre-liquidation claims which would only be settled through

the liquidation claim process. These entail filing of claim, due

verification and settlement in accordance with the rules governing

priority of claims. It is also the closing date that determines the status

of banks; employees. In a liquidation scenario, the closing date is

taken as the date when the contract of employment of the closed

bank’s staff is deemed to have come to an end and their severance

benefits are determined as at that date. Therefore, any work done

after the closing date is deemed as services performed for the

Corporation on temporary contract basis.

3.3 Post Closing Activities

In our earlier definition of liquidation, it was stated that it was the

process of realization of the assets of a business entity and the

distribution of the proceeds to those entitled to same. Consequently,

whenever the Corporation was appointed as the liquidator of a closed

bank, it acquires this new role which is separate and distinct from its

routine function as deposit insurer. Although there are provisions in

the NDIC Act which relate to its role as receiver/liquidator, the

53

Corporation is primarily guided by the provision of CAMA and the

BOFIA.

Section 25 of the NDIC Act conferred on the Corporation when

appointed as Receiver/Liquidator of a closed bank the following

powers:

i] to realize the assets of the failed bank,

ii] to enforce the individual liabilities of the shareholders and

directors,

iii] to wind up the affairs of the failed bank.

The powers given to the Corporation under Section 25 of the NDIC

Act are complementary to those under Sections 423,424 and 425 of

the CAMA. The essence of these powers is basically to enable the

Corporation to effectively conduct the winding up process in a manner

fair to all creditors and other stakeholders.

As stated earlier, the powers of the Corporation when appointed as

liquidator of a closed bank are separate from its statutory function of

providing insurance cover to depositors. As Insurer, the Corporation

is mandated to pay insured claims to the depositors of closed banks

subject to the statutory maximum provided in the NDIC Act or as may

be reviewed. Although the current insured limit is ₦50,000, the

NDIC Bill already passed by the National Assembly had reviewed the

54

amount to ₦200,000. Moreover, unlike the situation where the

Corporation could not increase the insured amount even if it wants to

do so, due to the rigid provisions in the current Act, the new

amendment has given the Corporation the power to increase the

amount from time to time without having to amend the Act.

As liquidator, the Corporation would be paying additional amounts to

the depositors and other creditors over and above the insured claims

through the declaration of liquidation dividends from the proceeds of

assets realization from time to time.

3.3.1 Realization of Assets

The bulk of the assets of banks in liquidation comprised physical

assets, risk assets and investments. Physical assets are usually valued,

advertised and disposed through sales agents.

Realization of risk assets (debts) however, involves a number of legal

issues which the liquidator has to contend with. Debts owed to banks

in liquidation are classified into secured and unsecured. Secured

debts are those that are secured either by legal mortgage, debenture

etc. A legal mortgage is a demise of property made by the borrower

to the lender for a term of years absolute, subject to a provision (right

of redemption) that the term shall cease if repayment is made within

the agreed period. The term legal mortgage implies that the deed has

been perfected by registration at the appropriate Lands Registry.

Registration makes the deed admissible in Court to proof the debt. A

55

legal mortgage usually contain a foreclosure clause which enables the

lender to proceed against the mortgaged property, on default without

recourse to the borrower provided the required notice as stipulated in

the deed is complied with. Where a mortgage is created but not

perfected, it becomes an equitable mortgage. An equitable mortgage

is also created by the deposit of title document of an asset

accompanied with a memorandum of deposit signifying intention to

create a mortgage.

Differential consequences apply depending on whether it is a legal or

an equitable mortgage. In respect of a legal mortgage if there is

default in making payment by the borrower and the required notice

has been given the lender can proceed to realize the collateral without

further recourse to the borrower. However, where the mortgage is

merely equitable, upon default by the borrower, the lender can only

enforce his security through redress in the court of law.

Recovery of debts owed to closed banks are usually farmed out to

external Solicitors for necessary action, usually through litigation and

their fee paid on commission basis calculated as a percentage of

amount recovered. There are approximately 2000 debt recovery briefs

assigned to solicitors in respect of the banks that currently undergoing

liquidation. More than 1000 of the cases are currently the subject of

pending litigation in various Courts. These cases are moving very

slowly due to the well known lapses in the judicial process.

56

The Failed Banks Act was enacted in 1994 to facilitate the recovery of

debts owed to distressed banks. The Act also established the Failed

Banks Tribunals which was conferred with jurisdiction to handle

cases of recovery of debts owed to failed banks and the trial of cases

of financial malpractices in banks for which stiff penalties were

prescribed. It introduced summary procedures for both debt recovery

and criminal prosecution so as to dispose of the cases timely.

Records have shown that during the lifetime of the Tribunals from

1995 to 1999, tremendous results were achieved in the area of debt

recovery as loans that were otherwise considered uncollectible were

recovered. However, following the restoration of democratic

government in May 1999, the Failed Banks Tribunal was scrapped

and its jurisdiction was transferred to the Federal High Court. This

marked the resurgence of the ear of endless adjournments, undue

reliance on legal technicalities, frivolous interlocutory appeals and

other cases of outright abuse of Court processes. Consequently, the

rate of recovery has gone down and necessitating the need for new

initiatives to address the problem. Although the emergence of

Economic and Financial Crimes Commission (EFFC) has brought

some fresh goad to the debt recovery process, the slow pace of

judicial process has continued to compromise the Commission’

effectiveness.

57

3.3.2 Settlement of Claims

It is also the responsibility of the Corporation as liquidator to settle the

claims of depositors and other creditors of a closed bank from the

proceeds of assets realization. Since the main ground for bank closure

and liquidation has been insolvency, it follows that there is usually

insufficient cash to settle all the claims of depositors. Consequently,

the rules of priority of claims would guide the liquidator in the

distribution of the proceeds of assets realization. Section 494 of

CAMA has set out the order of priority of claims which placed taxes,

rates, wages of staff, etc as preferred claims followed by secured

creditors and lastly, the general or unsecured creditors.

However, the order of priority of claims under CAMA was modified

by the provisions of Section 50 of BOFIA which as stated earlier

enjoys supremacy over CAMA wherever there is any inconsistency

between the two statutes. Section 50 of BOFIA, provides that where a

bank is unable to meet its obligations or suspends payment, the assets

of the bank in the Federation shall be available to meet all the deposit

liabilities of the bank and such deposit liabilities shall have priority

over all other liabilities of the bank. Consequently, the current

position is that the depositors enjoy the highest priority in the

settlement of claims. In other words, the depositors must be paid in

full before settling other categories of creditors. In practical terms, as

soon as the depositors are fully paid, the order of priorities established

by CAMA would be followed. Shareholders are entitled to the

residual estate after all creditors have been fully settled.

58

For the avoidance of doubt, the insured deposit claims paid by the

Corporation as Insurer is outside the rules on priority of claims since

the funds for the payment of insured claims are not from the proceeds

of assets realization, but from the Corporation’s deposit insurance

funds (DIF) which is funded by the premium collected from insured

banks. However, where the Corporation settles the insured depositors,

it steps into their shoes by virtue of the principle of subrogation. This

would enable the Corporation to participate in the distribution of

liquidation dividend due depositors. In other words, the liquidation

dividend due to the insured depositors in respect of the insured portion

earlier paid by the Corporation would be collected by NDIC since the

depositor cannot receive double payment.

3.3.3 Termination of Liquidation

Bank liquidation cannot continue for ever and so must at a certain

stage come to an end through a process known as termination.

Termination is initiated when ever all creditors have been fully settled

and the surplus if any paid to the shareholders, or all available assets

have been fully realized or where the cost of further realization is

perceived to be more than the expected proceeds.

If the liquidator makes a determination to terminate the liquidation, a

notice of (30) days would be given to all claimants and shareholders

that final dividend distribution has been made and that the remaining

assets if any, are not realizable for future distribution and that an

59

application for termination of liquidation would be presented in court.

The liquidator is required to file an application to the Federal High

Court, pursuant to Section 454 of CAMA requesting an order

terminating the liquidation and for the dissolution of the bank.

The court after due consideration of application could make an Order

for the termination of liquidation and the dissolution of the bank after

which the bank stands dissolved from the date of the order. A copy of

application for termination including the liquidator’s report is filed

with the Corporate Affairs Commission (CAC). The dissolution order

is the final death sentence that is pronounced on the life of the bank as

a corporate legal entity. Thereafter, the name of the bank is removed

from the list of existing companies maintained by the CAC. The

Liquidator would thereafter apply for a formal discharge or release

from the responsibilities of a liquidator.

Under the Winding Up Rules, the Liquidator is required to give notice

of his intention to apply for release, to creditors who proved their

debts and the contributories. The notice will include a summary of

receipts and payments in the winding up. The Commission shall

cause a report to be prepared on the audit of the Liquidator’s account

after which it may release the liquidator accordingly.

It is significant to note that any unclaimed funds or undistributed

assets after termination would be vested in the state as “bona

vacantia” (vacant property).

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4.0 LEGAL ISSUES

Bank Liquidation is a very complex process that is characterized by a

number of legal issues. Indeed virtually every process involved in

bank liquidation has legal implications, hence it is difficult to define

the precise scope of legal issues that is worthy of mention.

Fortunately quite a number of the legal issues have already been

discussed in the course of the presentation. Nevertheless, there are a

new other legal issues that would be highlighted below, at least for

emphasis.

4.1 Legal Effect of Appointment of Liquidator

The appointment of a liquidator including a provisional one has the

effect of immediately terminating all the powers of the Board of

Directors of the closed bank according in accordance with Section

422(9) of CAMA. The liquidator steps into the shoes of the erstwhile

board and assumes full responsibility for the affairs of the closed bank

and can execute all the powers of the bank either in the name of the

bank or in the name of the liquidator.

Furthermore, the employment of the entire personnel of the target

bank comes to an end upon the appointment of a liquidator,

notwithstanding the terms of the contract of employment between the

staff and the bank. This is based on the fact that one of the parties

(the Bank) is no longer in a position to comply with the contract. It is

like the contract has been frustrated. It is for the above reason that the

61

staff of a closed bank who work with the liquidator after the date of

appointment of a liquidator are regarded as temporary staff engaged

by the liquidator.

4.2 The Dual Capacity of the Corporation

Statutorily, the Corporation is a deposit insurer and as such it is

mandated to pay insured claims whenever there is a bank failure. As a

supervisory institution, it also performs some related functions like

bank supervision and distress resolution as stipulated by its enabling

Act and the BOFIA. However, when the Corporation is appointed as

a liquidator of a closed bank, it is a completely separate role. In that

capacity, it acts as a trustee with mandate to wind up the affairs of a

separate legal entity. Its role as a liquidator is regulated primarily by

the CAMA. It is therefore, clear that the affairs of a bank being

liquidated by the Corporation should not mixed up with its own

affairs. Its duty as a liquidator is to identify, recover and convert to

cash all known assets of the closed bank and apply the funds to settle

the proved liabilities of the same bank. Unfortunately, there has been

considerable misconception even among judges on the dual roles of

the Corporation. There had been cases where the physical assets of

the Corporation were attached on account of the liabilities of a closed

bank. In other instances, the bank accounts of the Corporation were

garnisheed to satisfy the claims against a bank in liquidation. In all

the examples given, the transactions were consummated long before

the closure of the banks and the appointment of the Corporation as

Liquidator. Extensive public enlightenment is therefore required on

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this issue and the FICAN members here present have a great role to

play in that regard.

4.3 Rule Against Preferential Payment

Further to the rules on priority of claims earlier discussed, it should be

emphasized that no single creditor even among the group that enjoys

priority should have his claims settled ahead of other members of the

same class. In other words, payment of claims must be made pro rata

to all claimants of the same class. Furthermore, all members of a

priority group must be paid in full before members of another inferior

class could be considered for payment.

4.4 Protection of Assets of banks in liquidation

In order to reinforce the rule against preferential payment, legal

protection has been provided for closed banks’ assets against creditors

who may wish to levy execution on them. Section 500 of CAMA

provides that where a creditor issues execution against any goods or

land of a company or attaches any debt due to the company and the

company is subsequently wound up, the creditor shall not be entitled

to retain the benefit of the execution or attachment against the

liquidator in the winding up of the company unless he had completed

the execution or attachment before the commencement of winding up.

Similarly, Section 414 of CAMA provides that where a company is

being wound up by the Court, any attachment, sequestration, distress

63

or execution put in force against the estate or effects of the company

after the commencement of winding up shall be void.

It is also noteworthy that the proposed amendment to the NDIC Act

had addressed some of the weaknesses in the current Act and had

therefore made a number of provisions aimed at providing more

protection to the closed banks’ assets as well as that of the

Corporation. Provisions were also made to facilitate a more

expeditious liquidation process. One of the new provisions in the

proposed amendment has placed some restrictions on the grant of

injunctive reliefs against the Corporation while performing its

function as liquidator of a closed bank. If the proposal comes into

effect, injunctions against the Corporation could only be granted by

the Court of Appeal.

5.0 CONCLUSION

In the above presentation an attempt had been made to take the

participants through the legal issues in bank liquidation that are

noteworthy, taking into account the time frame available for the

discussion. We have certainly not covered the whole of the legal

issues involved given my earlier statement that the entire liquidation

process is dominated by legal issues.

It is quite evident that the Corporation has been contending with a lot

of challenges in the course of performing its role as liquidator for

closed banks and most of these challenges relate to legal issues.

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There is no doubt that the existing legal framework for bank

liquidation is not adequate and has to be improved upon. The

proposed amendments to the NDIC Act have gone a way in this

regard, except that it had not been signed into law by Mr. President

yet. Furthermore, it has been observed that no matter how robust the

legislative framework might be, the slow and cumbersome judicial

process could reduce it to “toothless bull statute”. Consequently,

there must be corresponding reforms in the judicial process, the

details of which should be a subject matter of another discussion.

However, as significant increase in the number of judicial officers,

improvement in court infrastructures, review of Court rules and

procedures, increased conditions of service for judicial officers and

improved training are some of the measures that could be considered

in the reform agenda.

It is my sincere hope that I have been able to sensitize the participants

to some of the legal issues involved in bank liquidation albeit

admittedly in general terms. The question and answer session may

also provide yet another opportunity for further clarification on issues

mentioned or omitted.

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6.0 REFERENCES

Black, H. C. (1990), Black’s Law Dictionary, West Publishing

Company

Federal Government of Nigeria (FGN) (1988), Nigeria Deposit

Insurance Act No 22 (as amended)

------------------------------------------------- (1990), Companies and

Allied Matters Act No. 1 (as amended)

------------------------------------------------- (1991), Banks and Other

Financial Institutions Act No. 25 (as amended)

--------------------------------------------------- (1994) Failed Banks

(Recovery of Debts) and Financial Malpractices in Banks Act No. 18

66

OVERVIEW OF THE BANKING CONSOLIDATION PROGRAMME

AND ITS AFTERMATH****

By

Dr. J. Ade Afolabi, Deputy Director, Research Department, NDIC.

1.0 INTRODUCTION

In July 2004, the Central Bank of Nigeria (CBN) unfolded a 13-Point

Agenda as components of an elaborate Banking Sector Reform Programme.

The Phase I of the reform programme was aimed at consolidating and

strengthening the banks while phase II would encourage the emergence of

regional and specialized banks. Prior to the introduction of the bank

consolidation programme, statistics as at the end of 2003 reveal that 69 out

of 89 licensed banks in the system operated as marginal players. In addition,

the banking industry exhibited the following fundamental problems, among

others:

¡ Poor asset quality;

¡ Undercapitalization;

¡ Poor corporate governance;

¡ Late or non-publication of annual accounts;

¡ Over-dependence on public sector deposits (accounting for over 20

percent of total deposit liabilities of deposit money banks and over 50

percent in some banks). The implications were that the resource base of

* Original version of this paper was delivered at the Fifth NDIC-sponsored FICAN Workshop held from 28th to 30th November, 2006 in Benin City, Edo State

67

such banks were weak and volatile, rendering their operations highly

vulnerable to swings in government revenue, which in turn was equally

plagued by uncertainties of the international oil market;

¡ Inadequate risk management practices; and

¡ Neglect of small and medium scale enterprises by the system.

Also, the examination results of banks, as at the end of year 2003 revealed

that pockets of distress still persisted in spite of the numerous efforts made

by the regulatory/supervisory authorities. What is more, an assessment of

the nation’s banking industry financial condition and performance against its

expected role in the nation and/or against those of its counterparts in

emerging economies showed that the Nigeria banking system could be

described as fragile, poorly developed and extremely small.

The reform programme of the banking system through consolidation

introduced by the CBN could therefore be seen as an attempt to promote

banking system stability and make the industry to operate more efficiently so

as to enable the banks perform their catalytic role of financial intermediation

to enhance the growth of the Nigerian economy. The specific reasons for

the reform included the following:

– To halt the incessant bouts of distress

– To prevent imminent systemic distress

– To promote competitiveness and transparency in the sector;

– To enable the sector effectively play its developmental role in the

economy;

68

– To strengthen the sector to become an active participant in the

regional and global financial system; and

– To enhance public confidence in the banking system

The Key Agenda item in the first phase of the reform programme was the

prescription of minimum capitalisation requirement of N25 billion for each

bank which should be met by 31st December 2005. The requirement was to

be met by each bank through:

Ø Recapitalisation via rights issues to existing shareholders, private

placement and public offers for subscription in the capital market; and

Ø Consolidation of banking institutions through mergers & acquisitions.

By December 31, 2005, twenty-five (25) bigger banks emerged from

hitherto 89 banks in the system through recapitalization and

mergers/acquisition. However, the operating licences of 14 technically

insolvent banks that could neither raise their capitalisation to N25 billion nor

get merger partners/acquirers were revoked.

The purpose of this paper is to highlight the outcome of the banking

consolidation exercise in terms of its effects on the key stakeholders and

their responses (if any) to such effects. In that regard, the rest of the paper is

organized into three sections. In Section 2, we enumerate and briefly

discuss each of the key stakeholders. Section 3 enumerates the outcome of

the consolidation programme and its effects on each of the key stakeholders

as well as their (stakeholders’) responses to such effects. The last section

summarises and concludes the paper.

69

2.0 BANKING SECTOR KEY STAKEHOLDERS

While the stakeholders of the banking sector are numerous, within the

context of this paper, the key stakeholders have been identified as the twenty

– five emerging banks, the regulatory/supervisory authorities (mainly, the

CBN and NDIC), the Banking Public, especially the depositors and other

customers of banks as well as the economy. Each of these stakeholders is

examined below.

2.1 The Banks

At the end of the bank consolidation exercise, 25 banks emerged. These

banks are predominantly retail banking institutions that accept deposits from

one set of the banking public (the surplus-spending public, depositors) and

make short-term loans to another set of the banking public (the deficit-

spending public, borrowers). The banks and the constituent banks that made

the emerging twenty – five banks are as listed in Table 1.

TABLE 1

LIST OF EMERGING BANKS AFTER THE BANK CONSOLIDATION EXERCISE

S/N Bank Name Members of the Group 1 Access Bank Plc

Marina Bank Capital Bank International Access Bank

2 Afribank Plc

Afribank Plc Afrimerchant Bank

3 Diamond Bank Plc

Diamond Bank Lion Bank African International Bank (AIB)

4 EcoBank EcoBank 5 ETB Plc

Equatorial Trust Bank (ETB) Devcom

6 FCMB Plc

FCMB Co-operative Development Bank Nig-American Bank Midas Bank

7 Fidelity Bank Plc

Fidelity Bank FSB Manny Bank

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8 First Bank Plc

FBN plc FBN Merchant Bank MBC

9 FirstInland Bank Plc

IMB Inland Bank First Atlantic Bank NUB

10 GT Bank Plc Guaranty Trust Bank 11 IBTC-Chartered Bank Plc*

Regent Chartered IBTC

12 Intercontinental Bank Plc

Global Equity Gateway Intercontinental

13 Nigeria International Bank Ltd Nigeria International Bank Ltd 14 Oceanic Bank Plc

Oceanic Bank In't Trust Bank

15 Platinum-Habib Bank Plc

Platinum Bank Habib Bank

16 Skye Bank Plc

Prudent Bank Bond Bank Coop Bank Reliance Bank EIB

17 Springbank Bank Plc

Guardian Express Bank Citizens Bank Fountain Trust Bank Omega Bank TransInternational Bank ACB

18 Stanbic Bank Ltd* Stanbic Bank 19 Standard Chartered Bank Ltd Standard Chartered Bank Ltd 20 Sterling Bank Plc

Magnum Trust Bank NBM Bank NAL Bank INMB Trust Bank of Africa

21 UBA Plc

STB UBA CTB

22 Union Bank Plc

Union Bank Union Merchant Bank Universal Trust Bank Broad Bank

23 Unity Bank Plc

New Africa Bank, Tropical Commercial Bank, Centre-Point Bank, Bank of the North NNB, First Interstate Bank Intercity Bank, Societe Bancaire Pacific Bank

24 Wema Bank Plc

Wema Bank National Bank

25 Zenith International Bank Plc Zenith International Bank Plc Source: NDIC 2005 Annual Report

71

Table 1 shows that out of the 25 banks, six banks, namely: Ecobank Plc; GT

Bank Plc; Nigeria International Bank Ltd.; Stanbic Bank Ltd.; Standard

Chartered Bank Ltd.; and Zenith International Bank Plc. made the N25

billion capitalisation without any merger/acquisition. It is instructive to note

that out of the six banks that made the N25 billion capitalisation without any

merger/acquisition, four of them, namely: Ecobank Plc; Nigeria

International Bank Ltd.; Stanbic Bank Ltd.; and Standard Chartered Bank

Ltd were affiliates of foreign banks. The table further reveals that on the

average, about four banks came together to form one new bank for the rest

nineteen banks that met the N25 billion minimum capitalization requirement

through mergers/acquisition. Out of these nineteen banks, Unity Bank Plc

had nine constituent banks, indicating that it had the highest number of

banks that came together, followed by Spring Bank Plc with six constituent

banks and Sky Bank Plc as well as Sterling Bank Plc with five constituent

banks each. The table also shows that each of the following five banks,

namely: Afrbank Plc, Equitorial Trust Bank Plc, Oceanic Bank Plc, Bank

PHB and Wema Bank Plc, had two constituent banks.

The pre-occupation of the banks at the end of the bank consolidation

exercise would be to survive and maximize value addition to its

shareholders, depositors and the economy.

2.2 The Regulatory/Supervisory Authorities

In order to prevent the collapse of the payments mechanism in the economy,

ensure monetary stability, encourage efficient and competitive banking

system, protect consumers’ interest and ensure safe and sound financial

system, adequate regulation and supervision of banking institutions is a ‘sine

72

qua non’. The Central Bank of Nigeria (CBN) is the apex regulatory agency

for money and banking in Nigeria. The CBN is responsible for licensing

financial institutions in the system. The Nigeria Deposit Insurance

Corporation (NDIC), often provides inputs in the licensing process in the

area of ascertaining the ‘fitness and properness’ of promoters as well as

members of management of banks. As an integral part of the nation’s safety

net, the NDIC operates as a risk minimiser. It has powers to insure licensed

banks, monitor their health status through supervision as well as provide

mechanism for orderly resolution of failure including bank liquidation.

Banking supervision is therefore, a joint responsibility of the CBN and the

NDIC. The responsibility is carried out through on-site examination and

off-site surveillance.

The CBN’s main focus is to promote the stability of the banking system,

foster smoother monetary policy transmission mechanism and engender the

required confidence in the nation’s banking system (in collaboration with the

NDIC) particularly after the consolidation exercise in view of the fact that

the exercise is policy-induced. In particular, consolidation could, at least in

theory alter the credit channels of monetary policy. In that regard, Ferguson

R. G, in his Keynote Address presented at the Conference on The Impact of

Financial Innovation organized by the Federal Reserve Bank of New York in

May 2002, opines that since consolidation fosters the creation of larger

banks which have better access to markets for managed liabilities, it could

affect the way that the availability and pricing of bank loans adjust in

response to changes in the stance of monetary policy. It may be however,

hazy to assess the impact of consolidation on the transmission mechanism of

monetary policies or even its impact on the conduct of monetary policy.

73

In the case of the NDIC, its primary mandate is to protect the depositors

especially of the failed banks by paying their insured deposits and of the

surviving banks by ensuring safe and sound banking practices of the

institutions.

2.3 The Banking Public

The banking public is made up of the private business enterprises, other

corporate bodies, government and private individuals. Usually, a complex

set of contracts emerges from the intermediation role of banks. One of such

contracts is civil contract between the depositor and the bank in which the

bank borrows fund from the depositor and pledges to pay the nominal value

of the deposit plus interest at the due date. This is often referred to as a

liability – side liquidity promising contract of unconditional withdrawal right

to depositors. The second set of contracts is that which exists between the

borrower and the bank on a loan in which the bank deploys depositors’ fund

(also referred to as asset – side loan contract). Yet another set of contracts is

a social contract that the citizens expect that the state will protect individual

property rights by enforcing the civil contracts through regulatory agencies,

in the same way as an impartial judiciary does.

With the completion of the bank consolidation exercise, the expectation of

the banking public is that they would be served better by the emerging

bigger banks either as depositors or borrowers. Also they expect the

relevant regulatory/supervisory authorities to protect their (particularly, the

depositors) individual property rights by reducing their burden of loss

74

arising from the failure of the 14 banks that could not make the minimum

capitalization requirement.

2.4 The Economy

A symbiotic relationship exists between the banking sector and the

economy. A developing economy like Nigeria requires a strong and stable

banking sector that will support the real sector. With the bank consolidation

exercise, the economy expects enhanced support from the emerging banking

system.

3.0 THE OUTCOME OF THE CONSOLIDATION PROGRAMME

AND ITS EFFECTS ON EACH OF THE KEY

STAKEHOLDERS

The issues that are examined in this section include the following: What are

the specific outcomes of bank consolidation programme to each key

stakeholder and how are these key stakeholders affected by the outcome of

the Bank Consolidation Programme? How do they (i.e. the key

stakeholders) respond to the effects? These issues are examined for each of

the identified stakeholders.

3.1 The Banks

3.1.1 Enhanced Capital Base for Banks

The immediate impact of the consolidation programme is the increase in the

capital base of banks. Primarily, bank capital is expected to serve as a

cushion for absorbing operational losses. The funding of acquisition of

banks’ physical assets by bank capital is regarded as a secondary function.

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This position on the role of bank capital is in sharp contrast to its role in the

case of say, manufacturing and other concerns that are not financial

intermediaries. Capital for these concerns is primarily needed to finance

their acquisition of fixed assets and to a reasonable extent their working

capital.

The operational losses of banking firms arise from the way they manage

their assets and liabilities. In particular, both the liabilities and assets are

subjected to certain risks like interest rate, exchange rate and credit risks

(among others), which could result in financial losses to a bank. These

losses are of two main categories, those that are reasonably expected, that is,

identified deficiencies, and those that are unexpected. Provisions are

explicitly made for the former while capital cushion is the prudential

approach often used to absorb the latter.

Adequate capital is therefore necessary in banks to ensure their safety,

soundness and stability as inadequate capital enhances the potential for

failure. In that regard, the regulatory framework should contain meaningful

minimum capital adequacy guidelines. It is instructive to note that prior to

the introduction of the new capitalization requirement, many of the banking

institutions were suffering from capital inadequacy and that situation made

another round of mass bank failure more likely than ever. The result of the

consolidation exercise was the astronomical increase in the banking industry

capital base. In the process of complying with the minimum capitalization

requirement, about N406 billion was raised by banks from the capital

market. As at the end of October 2006, the industry shareholders’ fund,

(unimpaired by losses) stood at about N970.77 billion as against its level of

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N333.17 billion and N768.0 billion in December 2004 and 2005

respectively. The enhanced capital base, all things being equal, implies

increased ability of the banking industry to absorb shocks thereby ensuring

the stability of the system.

3.1.2 Keener competition among operators

Contrary to predictions that the reduction in the number of players in the

banking industry was going to lead to a concomitant reduction in the

intensity of competition, the reverse has actually been the case. Competition

in the industry has heightened with the market becoming more demanding

and sophisticated, notwithstanding the reduction in the number of banks. In

fact, the competition went beyond the shores of the country. Prior to

consolidation, there were a few Nigerian banks with branches located

outside the country. However, as at the end of October 2006, several

Nigerian banks had opened branches in a number of African countries and

some are even planning to open branches in the Middle East, Europe and

America.

3.1.2 Reconstitution of New Board and Management

The Board of Directors constitute the highest policy making organ of a bank

and what happens at the Board of Directors’ level impacts fundamentally on

the management of the institution. Experience has shown that no matter how

effective statutory regulation is, it does not substitute for the role of active

and efficient boards of directors in banks. Hence, it remains the duty of bank

directors to ensure that there is sound management in their banks. Insured

banks’ directors are expected to formulate policies for sound operations of

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their banks, as well as undertake other responsibilities that serve the best

interest of stakeholders. The Organization for Economic Co-operation and

Development (OECD) principles emphasize the criticality of the board in

corporate governance especially its composition, leadership, integrity and

independence.

In spite of their initial misgivings, banks Board and management have come

to accept the bank reform programme. They have agreed, in the process, to

share the fortunes of their banks with other Nigerians by going to the capital

market to look for new investors.

It would be recalled that prior to the consolidation programme there existed

a ‘concentrated ownership’ structure in Nigerian banks, whereby several

small banks were owned almost exclusively by a single individual or

members of the same family. With the dilution in shareholding there arose

the need for a re-constitution of new Board and Management and

appointment of new board members with diverse background. These

developments had no doubt, enriched the quality of board deliberations and

strengthened corporate governance practices in insured banks.

3.1.3 People, Culture, Data and System Integration

The on-going banking industry consolidation is likely to pose additional

corporate governance challenges arising from integration of people,

processes, IT and culture. Research had shown that two-thirds of mergers,

worldwide, fail due to inability to integrate personnel and systems as well as

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due to irreconcilable differences in corporate culture and management,

resulting in Board and Management squabbles.

The emergence of mega banks in the post-consolidation era is bound to task

the skills and competencies of Boards and Managements in improving

shareholder values and balance same against other stakeholder interests in a

competitive environment.

One of the impacts of the consolidation programme was the integration of

ICT to have a unified single information processing platform. A serious

concern was how to deal with the cut-over/transition from legacy operating

platforms to a single platform in a prompt and seamless manner with

minimal disruption of customer service.

Arising from the deployment of a single operating platform was the need to

embark on the harmonization of processes and procedures across the bank.

Some of the issues in this area include:

· development and deployment of new operations manual

· issuance of unified cheque and passbooks to customers;

· unification of clearing system;

· rationalization of correspondent banks-local and foreign;

· consolidation of customers’ accounts; and deployment of harmonized

operation-related forms and documents

· Harmonization of Customer Account Numbers

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Another critical integration challenge was that of people and culture of the

merging banks which included synchronization of staff grading and structure

as well as ensuring the right mix of staff in terms of quality and quantity.

Other challenges included developing a human capital management policy

and change management issues.

The post-consolidation challenges arising from integration are fairly

common amongst the merged institutions. However, integration of banking

activities is considered a gradual process which cannot be achieved

immediately in one fell swoop. In the long run however, consolidation is

expected to lead to the deployment of highly sophisticated IT systems that

would be of immense advantage to the industry in particular and the

economy in general, particularly since each bank has an enhanced financial

muscle to acquire the needed IT infrastructure.

3.1.4 Branch consolidation/rationalization

Consolidation particularly where the merging institutions have branches in

the same location, may lead to a reduction in the number of branches, and

hence, a reduction in the provision of banking services in the short-run. But

in the long run, because the merger will translate into, among other things,

bigger capital, the new bank will have the capacity to open more branches

beyond what the individual banks could have opened before the merger and

this would lead to the extension of banking services to more parts of the

country. The actual experience of bank consolidation in Nigeria has shown

that there has not been any decline in the total number of insured bank

branches despite the revocation of operating licenses of 14 banks by the

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CBN. For instance, as at the end of December 2005, there were a total of

3,535 branches/offices operated by all the insured banks in the country.

Between 2005 and 2006, the total number of bank branches increased by 300

or 8.5% to 3,835. The reason for the high growth in the number of bank

branches was increased competition in the industry as a result of banks

operating with a higher capital base, higher expectation of shareholders of

increased profitability and the adoption of Purchase and Assumption as a

failure resolution model by the regulatory authorities which had made the

acquiring banks to retain most branches of the failed banks.

3.1.5 Staff rationalization

In a service industry such as banking, motivation of staff is a key factor in

ensuring that efficiency is maintained. When banks consolidate, there is the

tendency that jobs might be lost as part of the repositioning strategies the

new management may want to undertake. Apart from the adverse impact on

employment level, the development could also impact negatively on the

morale of the remaining workforce. This situation was witnessed, at least

initially. However, appropriate strategies were put in place by the new

managements of the emerging banks to address the dwindling morale of the

remaining staff. In addition, adequate attention was given to trade unions in

the industry in order to minimize disruptions from their activities arising

from staff rationalization exercise.

The adverse effects on employment had since waned with time as individual

banking institutions embarked on massive recruitment of staff to cope with

the challenges posed by rapid growth and expansion in their operations.

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Currently, the banking industry has become the largest employer of labour,

net of attrition.

3.2 The Regulatory/Supervisory Authorities (NDIC and CBN)

3.2.1 Call on NDIC to play its role as deposit insurer and liquidator

As at December 31, 2005, when the first phase of the banking sector reform

programme ended, 14 of the former 89 banks were unable to either

consolidate or raise their capitalization to the required minimum of N25

billion. Consequently, the CBN revoked their operating licences on January

16, 2006 and appointed NDIC as the official liquidator. The NDIC in

accordance with the provisions of its Act, proceeded to the courts to obtain

winding-up orders, prior to the commencement of the liquidation process.

The winding up procedure requires that the NDIC would first apply to the

Federal High Court for Provisional and Final Orders of court to commence

the liquidation of the closed banks.

Therefore the NDIC promptly filed the necessary applications whereby it

sought the order of the Federal High Court to commence the winding up

process of the failed banks in accordance with the law. However, the action

of the Corporation was immediately challenged in court by some of the

former owners and directors of the closed banks. The counter suits filed by

these owner-directors unduly delayed the liquidation time frame.

Notwithstanding the above hurdles, the Corporation and CBN had through

dogged determination, obtained Final Court Orders to liquidate 9 of the 14

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defunct banks and as provisional liquidator for 2 of the banks as at the end of

October, 2006. The banks for which the Corporation had obtained final

court orders as liquidator were:

– Allstates Trust Bank;

– Lead Bank;

– Trade Bank;

– Assurance Bank;

– City Express Bank;

– Metropolitan Bank;

– Hallmark Bank;

– African Express Bank; and

– Gulf Bank.

The two banks for which the Corporation had been appointed provisional

liquidator were:

o Fortune International Bank; and

o Eagle Bank.

It is instructive to note that as a deposit protection agency, NDIC out of its

concern about the likelihood of a shake-out in the banking industry

following the policy shift, had put in place appropriate strategies to ensure

adequate depositor protection under a consolidated banking environment.

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3.2.2 Closing exercise, deposit and fixed assets verification were carried

out on all the 14 banks whose operating licenses were withdrawn

The NDIC is responsible for the orderly and efficient closure of failed

institutions. The closures are done with minimal disruption to the banking

system. After closure, the assets of the failed institutions are realized in the

most cost-effective manner and the proceeds appropriated among the various

claimants in accordance with relevant laws. The laws give depositors

seniority of claim on a failed bank’s assets over and above other

stakeholders such as preferred creditors, general creditors, and shareholders.

A major objective of the Corporation as an insurer under the Deposit

Insurance Scheme (DIS) is to discharge its obligation to depositors when a

bank is closed. The guarantee given under the nation’s DIS to pay each

depositor up to the maximum insured sum when a bank is closed can only

be discharged if the identity of the depositor is known, his/her claims

verified with the records kept by the bank and a credible deposit register

generated.

As a prelude to the commencement of full payment of private sector

depositors in the 14 banks whose operating licenses were revoked by the

CBN at the end of the first phase of the consolidation programme, the NDIC

had to initiate orderly bank closure processes. This entailed ascertaining the

total and actual values of assets and liabilities in the banks as at the date of

revocation of their operating licenses.

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3.2.3 Failure Resolution Through Purchase and Assumption (P & A)

Transactions

The choice of a resolution option to address bank distress should take

cognizance of the peculiar environment of the country. This is particularly

important as a risk minimizing deposit insurance scheme is established to

among other things, handle bank distress and liquidate distressed banks in an

orderly, cost-effective and non-disruptive manner. The appropriate option

should therefore ensure stability in the banking system and minimize

economic disruption.

In consideration of a resolution approach that would be in the best interest of

depositors of the failed banks and to enhance public confidence in the

banking system, the regulatory authorities provided a blanket guarantee for

private sector depositors of the 14 banks that were closed in January, 2006.

To fulfill that objective, and to ensure access to banking services in

communities where the failed banks were located, the CBN/NDIC adopted a

modified variant of the (P&A) resolution method. Under the P&A

arrangement, interested consolidated banks were encouraged to purchase

some or all the assets of the failed banks and also to assume the liabilities

especially private-sector deposits. In order to facilitate the process and in

pursuance of its responsibility of promoting and sustaining public

confidence in the banking system, the CBN guaranteed the portion of the

deposits assumed by issuing Promissory Notes (PNs) while the NDIC

would transfer the value of the insured deposits to the acquiring bank(s).

In line with the above, the NDIC invited operating banks to assume the

private sector deposits and, in return, acquire either all or part of the assets

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of the failed banks for which it had obtained final court orders to liquidate.

By the end of October 2006, the deposits of all private sector depositors of

the defunct Allstate Trust Bank Plc had been transferred to Ecobank Plc that

assumed the deposit liabilities and acquired some of the closed bank’s

assets. Similarly, as at the same date indicated above, the deposits of all

private sector depositors of the defunct Lead and Assurance banks had been

fully transferred to Afribank Nigeria Plc that succeeded in the P & A

transactions of the closed banks.

Following the above arrangement, a number of successes have been

recorded. However, legal issues and challenges attendant to the resolution of

the failed banks had slowed down the process. Nevertheless concerted

efforts are being made to speedily resolve all outstanding legal issues and

litigation with a view to fast-tracking the liquidation process.

3.2.4 Corporate Governance Issues

Responsive corporate governance is always an aspect that is closely

monitored by the regulatory authority in order to ensure the transparency and

accountability of management of banking institutions and the curtailment of

their risk appetite.

Responsive corporate governance involves the enthronement of

mechanisms, processes and systems for ensuring that:

· there is appropriate direction and oversight by directors and senior

managers

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· there is transparency and accountability to the various stakeholders;

· the organisation complies with the applicable legal and regulatory

requirements;

· there is disclosure of all material information to stakeholders such as

investors, depositors, regulatory authorities, etc; and

· the organisation’s viability and solvency is sustainable through

adequate internal controls and audits as well as appropriate risk

management framework.

There is no doubt that responsive corporate governance remains a critical

success factor for the viability and survival of banking institutions. The

consolidation programme ha no doubt expanded the complexity of risks

undertaken by banks. The need for comprehensive and effective risk

management is therefore most imperative. This has become a challenge that

should be addressed in order to ensure effective and efficient regulation and

supervision thereby promoting banking system stability.

The recently introduced Code of Corporate Governance which was issued on

March 1, 2006 by the CBN is therefore a welcome development. The main

aim of the code was to address the observed lingering poor corporate

governance practices by Nigerian banks. The Code covers such critical areas

as Equity ownership; Organizational Structure; Quality of Board

Membership; Board Performance Appraisal; Quality of Management and

Reporting Relationship, among others. For the financial industry, the

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retention of public confidence through the enthronement of good corporate

governance remains of utmost importance given the role of the industry in

the mobilization of funds, the allocation of credit to the needy sectors of the

economy, the payment and settlement system and the implementation of

monetary policy.

3.2.5 Increased Agitation By Banks for Premium Burden Reduction

A notable development arising from the consolidation programme is

increased agitation by consolidated banks for a reduction in premium

burden. As expected, the consolidation programme led to the emergence of

relatively stronger and larger banks. As a consequence, depositors’

confidence in the nation’s banking industry received a big boost. In addition,

innovative and aggressive deposit mobilization techniques adopted by banks

led to a significant growth in deposit liabilities generated by banks. For

instance, deposit liabilities generated by insured banks increased by N0.94

trillion from N2.47 trillion as at December 2005 to N3.41 trillion as at the

end of October 2006, representing an increase of 37.63 percent. It was on the

basis of such significant growth in deposit liabilities, which had invariably

increased premium payable by banks that the agitation for a reduction in

premium burden heightened. Of course, with the current premium rate of 94

basis points, such agitation could not be dismissed with a wave of the hand.

As a responsible corporate citizen, the Corporation, following the approval

of the Board of Directors, removed Inter-bank takings from the premium

assessment base.

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Furthermore, the Corporation has put in place a process for the adoption of

the differential premium assessment system in its bid to introduce fairness

into the deposit insurance pricing system, promote sound risk management

systems in banks as well as reduce the burden of premium payment by

banks.

3.2.6 Capacity Building Including Putting in Place an Effective Risk

Management System

Bank consolidation has given rise to an enormous increase in both the size of

banks and their volume of operation. This has made capacity building in the

CBN and the Corporation more compelling. In that regard, staff of the

Regulatory/Supervisory institutions should be exposed to more focused

training, to enable them understand the risk profile of the banking

institutions as well as the various risk management models developed and

adopted by individual banks in order to ensure thorough supervision. Both

the CBN and NDIC should develop the capacity to implement the developed

framework for risk-based supervision. In addition, the two institutions

should procure relevant tools in Information and Communication

Technology (ICT) and upgrade existing ones in order to facilitate the

execution of its mandate. It was in recognition of this need that the Central

Bank of Nigeria (CBN) and NDIC developed a web-based information

system, otherwise known as electronic Financial Analysis and Surveillance

System (e-FASS). This tool enables the supervisory authorities to access to

banking information on an on-line, real time basis. Furthermore, the two

institutions have also made appreciable efforts in exposing staff to new

techniques of banking supervision at both local and foreign institutions.

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In the same vein, consolidation has brought to the fore the need for

consolidated supervision that requires consultation and cooperation amongst

the various regulatory/supervisory agencies in the system. The activities of

the Financial Services Regulation Coordinating Committee (FSRCC) should

be strengthened to ensure that supervisors obtain a global view of banks’

operations.

3.2.7 Poor/Inadequate Risk Management Systems

Prior to the consolidation exercise, Nigerian banking institutions had a

history of Poor/Inadequate Risk Management practices, which often resulted

in large quantum of non-performing loans and advances. Due to poor risk

management practices, Board members could advance huge sums of

depositors’ funds to themselves, their relations and/or to companies in which

they had interest. As a matter of fact, one of the major causes of distress in

some banks in the early 1990s was huge non-performing insider credits. In

some banks, internal controls were either very weak or completely non-

existent.

The comprehensive Risk Management Systems for Nigerian banks issued by

the CBN is designed to address risk management problems that had plagued

banks in the past.

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3.3 Effects on the Expectation of the Banking Public

Banking consolidation should potentially be in the public interest,

particularly in the area of service delivery as consolidation is expected to

add some depth to the local banking sector and make a worthwhile

contribution to banking services and the banking industry.

A frequent factor in motivating mergers is the possibility of scope

efficiencies. The pursuit of these efficiencies often results in the product

lines of the two entities being rationalized, with consequent cost benefits,

since a single delivery system is used to sell a “better’ (bigger) range of

products. This often increases the options that consumers have and enhances

the utility of these options.

Furthermore, economies of scale are fairly likely to improve after

consolidation. Larger transaction volumes and larger asset positions,

through a rationalized delivery system, mean that unit costs can be reduced.

When such cost reductions are passed on to the consumers, this may be

regarded as a public interest benefit. In Nigeria, most banks have had to

confront the challenge of harmonizing their products. In most cases, best

features/practices from similar products offered by the merged institutions

have had to be extracted and re-branded to depict the identity of the new

organization. This has seen the industry witnessing an unprecedented

launch/re-launch of an array of products, most of which were targeted

essentially at deposit mobilization. However, the nation is yet to witness any

noticeable reduction in transaction costs.

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In addition to the above, bank customers now have access to a higher

volume of facilities due to increased single obligor limit. Without any

shadow of doubt, consolidation has instilled greater confidence in the

banking industry due to the emergence of relatively stronger and bigger

banks. There has also been a remarkable improvement in service delivery

due to increased competition among banks.

3.4 Effects on the Economy

At the beginning of the bank consolidation programme there were doubts in

several quarters as to whether the Nigerian capital market had the necessary

depth, breadth and resilience to absorb the many bank issues that were to

enter the market. However, about 10 months after the end of the first phase

of the consolidation programme it has become apparent that the banking

consolidation programme has encouraged the development of the Nigerian

capital markets, with the attendant benefits for financial stability. This is

because since the introduction of the programme, banking institutions, in

order to comply with the minimum capital requirement and remain

competitive, have been compelled to raise funds from the capital market.

This has contributed in no small way towards increasing the tempo of

activities in the capital market. For instance, in the process of complying

with the minimum capitalization requirement, about N406 billion was raised

by banks from the capital market in addition to total Foreign Direct

Investment of US$652million and GBP162,000. Since the beginning of the

banking consolidation programme the market capitalization of quoted stocks

has grown astronomically as a result of the fund raising activities of banks.

There has also been a dilution in the ownership of banks in the country. A

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widespread ownership of banks has the potential benefit of reducing the

possibility of abuse by owners of banks, for instance, the owners using

banks to fund other activities. The ultimate effect of this development is a

stable banking system which has the ability to support the real sector of the

economy.

Another resultant effect of consolidation on the economy is the injection of

liquidity occasioned by increased minimum recapitalization requirement, a

situation that has given rise to a downward trend in interest rate movement.

Table 2 presents the trend of average interest rates for various types of

deposit accounts as well as the prime lending rate.

TABLE 2

AVBRAGE INTEREST RATE (%) BETWEEN 2004 AND 2006

YEAR SAVINGS TIME DEPOSITS PRIME

LENDING

RATE

7-

DAY

1 -

MONTH

3 -

MONTH

6 -

MONTH

12 -

MONTH

2004 4.9 7.3 13.3 14.3 12.3 10.8 20.0

2005 4.5 6.6 12.3 12.8 10.7 10.8 18.8

2006 4.5 6.4 11.7 11.3 8.9 9.3 17.5

Source: NDIC Data Bank

While the table still reveals a wide spread between lending and savings rates,

it nevertheless shows that interest rates on different classes of deposits as

well as the prime lending rate experienced downward trend between 2004

and 2006. This development could be attributed to the injection of liquidity

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into the banking system arising from capitalization drive as well as intensive

marketing devices for deposit, among other factors. That implies that the

cost of fund and cost of doing business had taken a downward trend

indicating a positive impact for the customers of banks, particularly the

deficit-spending members of the public.

Besides, more banks now have a higher capacity to support the real sector of

the economy. That assertion can be illustrated by the expression of the

Capital to Risk Weighted Asset Ratio, which the Regulatory Authority has

indicated to be at least 10% and which is given in its simplest form as:

Sharehoders’ Fund (Unimpaired by Losses) > 10%

SSSSWiAi

Where Wi is the risk weight of Ai (Risk Asset i)

From the expression above, if the numerator (Shareholders’ Fund,

unimpaired by losses) has been enhanced by the stipulated minimum

capitalization requirement of the consolidation exercise, it then implies that

the banks have expanded capacity to increase the denominator which

constitutes their risk assets (loans) to the economy without violating the

regulatory stipulation, all things being equal. Given that the real sector is the

engine of growth of any economy, it is heart warming that the real sector

which had suffered paucity of investible funds in the past now has

opportunity of having access to funds.

It is equally important to point out that banks are currently not only under

the regulatory oversight of CBN and NDIC but also that of the Securities

and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE)

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as almost all the banks are now publicly quoted. This has surely increased

the level of transparency, stronger information disclosure regime and

enhanced market discipline.

4.0 SUMMARY AND CONCLUSION

An attempt has been made in this paper to highlight some of the major

outcomes of the Banking consolidation programme. In particular, the

aftermath of the consolidation exercise has been related to each of the

identified key stakeholders vis-à-vis their mandates. While it may be

premature to be categorical about the impact on each of the stakeholders, it

will suffice to say that the programme has been offering the entire economy

with a lot of opportunities. However, there remain a number of challenges

that require attention in order to derive maximum benefits from the exercise.

5.0 REFERENCES

Afolabi J. A. (2004), “Implications of the Consolidation of Banks for the

Nigerian Banking System”, NDIC Quarterly Vol 14, No. 4 Fergurson R. W. (2002), “Understanding Financial Consolidation” Federal

Reserve Bank of New York Economic Policy Review. Ogunleye G. A. (2005), “Regulatory Challenges in a Consolidated Nigerian

Banking System – NDIC Perspective”, NDIC Quarterly Vol 15, No 1. Soludo, C. C. (2006), Being Press Release on “The Outcome of the Banking

Sector Recapitalization and the Way Forward for the Undercapitalized Banks”, Abuja, Nigeria

95

ISSUES IN PURCHASE AND ASSUMPTION AS A BANK FAILURE

RESOLUTION OPTION: THE CASE OF THE 14 CLOSED BANKS****

By

A. A. Adeleke, Deputy Director,

Receivership & Liquidation Department, NDIC

1.0 INTRODUCTION

Towards the end of the first phase of the banking reforms programme, it

became obvious that a number of banks would not be able to meet the

prescription of a minimum shareholder’s fund of N25 billion for a

Nigerian deposit money bank by December 13, 2005 nor secure a

merging partner for this purpose. The regulatory authorities therefore

gave the affected banks the opportunity to voluntarily surrender their

licences or have them revoked.

It is now history that 14 out of the then existing 89 banks fell by the

wayside while the rest emerged as the 25 banking institutions we find

today. The banks that failed and had their licences revoked on 16th

January, 2006 include African Express Bank Plc, Allstates Trust Bank

Plc, Assurance Bank Limited, City Express Bank Limited, Eagle Bank

Limited, Fortune Bank International Limited, Gulf Bank of Nigeria Plc,

Hallmark Bank Plc, Lead Bank Limited, Liberty Bank Plc, Metropolitan

* Original version of this paper was delivered at the Fifth NDIC-sponsored FICAN Workshop held from 28th to 30th November, 2006 in Benin City, Edo State

96

Bank Limited, Societe Generale Bank Nigeria Limited, Trade Bank Plc

and Triumph Bank Plc.

It is well known that one of the functions of the Nigeria Deposit

Insurance Corporation (the Corporation) is guaranteeing payments to

depositors in the event of imminent or actual suspension of payments by

insured banks or financial institutions up to the maximum provided in its

enabling law. In order to achieve this objective, the Corporation has the

onerous task of ensuring orderly closure and liquidation of failed banks.

This paper appraises the handling of the failure of the 14 banks.

Apart from this introduction, Section Two reviews the failure resolution

options available to the regulatory authorities while Section Three

examines the reasons why the Purchase and Assumption option was

adopted. We conclude in Section Four by highlighting the outcome of

the implementation of that option and consider the issues and challenges

thrown up by its adoption.

2.0 FAILURE RESOLUTION OPTIONS

Prior to the deadline set for recapitalization, the regulatory authorities

had indicated that banks that failed to meet the deadline would have their

licences revoked. That decision limited the failure resolution options that

could be considered to the following:

a) Deposits Pay-Out

The option involves the winding-up of a failed bank and payment of

the insured deposits up to the insurable limit to its depositors. The

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Corporation usually acts as liquidator of the closed bank. Depositors

with uninsured funds and other general creditors of the failed bank do

not receive either immediate or full reimbursement; instead they are

issued Liquidator’s Certificates. The certificate entitles its holder to a

portion of the dividend declared by the Liquidator from the failed

bank’s assets after all depositors have fully received payment.

Deposits Pay-Out include costs that cannot be easily estimated such as

administrative costs, staff salaries and other personnel emoluments of

the Liquidator. Other operational costs involve hiring of debt

collectors, lawyers, estate agents, security firms et cetera.

A clear advantage of this option is its ability to instill market

discipline in the banking system. Negative consequences include;

likely denial of banking services in the area where the failed bank

operates and loss of public confidence in the banking system.

Liquidation of assets could extend for many years. Consequently,

uninsured depositors, other creditors and shareholders could wait for

many years before being paid.

b) Insured Deposits Transfer

This entails the transfer of insured deposits of the failed bank to

another bank preferably within the same locality. The acquiring bank

will be given enough cash and/or risk-less assets to cover the insured

deposits transferred from the failed bank. The Corporation acting as

Liquidator takes over the assets of the failed bank which it realizes to

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settle claims of uninsured depositors, other creditors and liquidation

expenses.

Insured deposits transfer will ensure continuity of banking services

since the insured depositors could operate their accounts through the

acquiring bank. The option would hence be less disruptive to the

economy than pay-out. It would also promote market discipline as it

does not protect management and owners of the failed bank.

However, the Liquidator will still be saddled with the tedious work of

realizing the assets of the failed bank. This may take time and require

technical expertise. Uninsured depositors may not recover their funds

if the assets are not sufficient to pay their claim.

c) Purchase and Assumption (P&A)

This is a resolution transaction in which a healthy bank purchase some

or all the assets of a failed bank and assumes some or all the

liabilities, including all insured deposits. P&As are less disruptive to

communities than deposits pay-out. Acquirers may assume all

deposits, thereby providing 100 percent protection to all depositors.

Some categories of assets never pass to the acquirer, they remain with

the Liquidator. These include claims against former directors and

officers. Additionally, a standard P&A provision allows the assuming

bank to require the Liquidator to repurchase any acquired loan that

has forged or stolen instruments.

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The potential benefit associated with this option includes;

i. Customers with insured deposits have new accounts with new

bank (acquiring bank).

ii. Acquiring bank has the opportunity for new customers.

iii. Fewer assets are retained by the Liquidator, thereby reducing

cost of realization.

iv. It improves marketability of loans as they are being handled by

professional bankers in the services of the acquiring bank.

v. Loan customers continue to be served by acquiring bank.

The negative consequence of a P&A transaction according to FDIC

(1998) is that it seldom proves to be the least cost method in

comparison to other types of resolutions. It also requires much pre-

closing work for the staff of the Corporation. In addition, assuming

banks may also be reluctant to purchase some loans even if the assets

are offered at a discount.

d) Bridge Bank

A situation whereby the failed bank is turned over to a new bank

specifically set up to assume its assets and liabilities with little or no

compensation to the shareholders of the failed bank is known as

bridge bank. The bridge bank can be established and managed by the

Corporation for about 2 to 3 years. The bridge bank will retain the

failed bank’s license but operate under a different name preferably in

the same premises used by the failed bank.

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The bridge bank would permit continuity of banking services to all

customers and fully protect the depositors and creditors of the failed

bank. There would be no mass retrenchment of staff and this will

reduce social costs of liquidation through pay-out. It is therefore less

disruptive to banking services and would engender confidence in the

banking system.

The bridge bank may be costly and setting it up will take much time

and effort. Furthermore, the Corporation becomes responsible for the

operation of the bridge bank. It may also be difficult to retain the key

employees of the bank during the transition period while some of the

best customers may also leave the closed bank for stable banks. The

bridge bank could fail thus aggravating the cost of resolution. Besides,

there is no provision for bridge bank in existing laws.

3.0 RATIONALE FOR THE CHOICE OF P&A

In choosing the P&A as the resolution option to apply to the 14 failed

banks, the regulatory authorities were guided by the following public

policy objectives:

a) Private sector depositors are immune to the negative consequences

of the failure of the banks to meet the recapitalization level

required under the banking reform programme.

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b) Private sector depositors will not lose any of their deposits thus

engendering public confidence in the banking system thereby

encouraging savings.

c) Most of the assets of the failed banks are kept within the banking

system through their acquisition by the 25 banks that survived the

banking reforms programme.

d) Quicker payment to the depositors and afford them the opportunity

to continue banking relationships with the assuming banks if so

desired.

4.0 ISSUES & CHALLENGES

In executing the P&A transaction, the regulatory authorities

provided full coverage to private sector depositors thus limiting

public sector depositors to the insured portion. Assuming banks

were left to choose the assets they wish to purchase while the

Central Bank was to issue promissory notes for the deficit between

the private sector deposits assumed and the assets acquired.

So far P&A transactions with respect to 3 of the closed banks have

been concluded. Ecobank Plc acquired Allstates Trust Bank while

Afribank Plc acquired Assurance Bank Limited and LeadBank Plc.

However, the Corporation has encountered certain challenges in

the course of the exercise thus far. A few of these are considered

below.

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a) Legal Impediment

The law provides that the Corporation shall apply to the Federal High

Court for an order to wind up the affairs of a failed bank and for its

appointment as the official liquidator. This process gives shareholders

and other affected parties the opportunity to interrupt the process by

challenging the application for the winding-up order. Consequently,

out of the 14 banks whose licenses were revoked in January 2006 the

Corporation has been able to obtain winding-up orders for only 8 of

them. Furthermore, the owners of 2 of the banks for which winding-

up orders have been obtained have appealed against the order. The

Corporation cannot conclude P&A transaction in respect of banks in

these situations.

b) Depositors’ Protection

The current arrangement allows for full payment to private sector

depositors while public sector depositors receive only insured deposits

in the first instance. Further payment to public depositors depends on

the recoverability of the outstanding loans of the failed banks.

However, the definition of what constitutes private and public

deposits can be problematic. For instance school fees accounts opened

by public schools may be considered to be private deposits by some

people and public deposits by others.

c) Assets Stripping

Prior notice of impending closure of banks that fail to recapitalize

provided bank staff the opportunity to strip bank assets by

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appropriating vehicles and also swapping deposits with debtor

customers.

d) Poor Record Keeping

Much of the records of the failed banks are incomplete due to

sabotage or resignation of competent staff. In some cases problematic

IT systems and software prevented the Corporation from having

access to records.

e) Recovery of Bad Loans

So far, assuming banks have purchased only the physical assets and

unexpired leases of the failed banks leaving loan assets. As a result of

this the Corporation is saddled with the recovery of non-performing

loans.

f) Escalation in Bank Closing and Related Costs

The delay in obtaining winding-up order and the challenge of those

obtained has led to increase in the costs related to bank closure. Such

costs include salaries of members of the Interim Management

Committees (IMCs) appointed to superintend the affairs of failed

banks before the winding-up order is obtained, and of bank and

auxiliary staff. Rent is also paid for over-stay period in leasehold

premises. In some cases chattels have to be moved from premises

where the lease has expired with the attendant evacuation and

warehousing costs. Furthermore, legal expense is incurred defending

landlords’, depositors’ and other creditors’ claims against the failed

banks.

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5.0 CONCLUSION

In this paper, we have examined the basic options available to regulatory

authorities to deal with failed banks. Given the recent consolidation

exercise and the fall-out there from in which the licences of fourteen

were revoked, the P&A was adopted as the key option to deal with these

failed banks. Hence, we examined in details the rationale, benefits and

demerits of such option. We conclude by acknowledging that even

though the P&A option seems to be working under the present

dispensation, there are obvious outstanding issues and challenges which

needs to be tackled. Amongst others, those issues included assets

stipping, poor record keeping and escalation in bank closing and related

costs.

6.0 REFERENCES

Federal Deposit Insurance Corporation (1998), Managing the Crisis:

The FDIC and RTC Experience 1980-1994, FDIC Washington D. C.

Nigeria Deposit Insurance Corporation (2005), Bank Liquidation in

Nigeria (1994-2005), edited by P.N. Umoh, N.D.I.C Abuja, F.C.T